Essays in Honour of Keith Cowling
Edited by Michael Waterson
Chapter 5: ‘Price–Cost Margins and Market Structure’ Revisited
5. ‘Price–cost margins and market structure’ revisited Michael Waterson1 1. INTRODUCTION In the summer of 1972, I forget whether for six or eight weeks, Keith Cowling employed me on a project examining oligopoly. His original idea, inspired by Means (1962), was that there was a link between oligopoly behaviour and the rate of inﬂation. However, upon developing the model, it became clear that the link in theory was between the change in the degree of oligopoly and the change in pricing. I recall, when I returned to my parental home, telling my mother what I had been doing over those weeks – developing a model – she thought it pretty poor value. In retrospect, I cannot agree; indeed I wish I had spent a few weeks so productively more often! Eventually, this translated itself, via my PhD and a lot of work by Keith, into our joint paper, ‘Price–cost margins and market structure’ (1976) which remains clearly the most-cited piece either of us have. The model was one of the early elements to provide a rigorous theoretical underpinning for the cross-sectional structure–performance work so popular in industrial economics at that stage. It made two things clear, that the appropriate margin was a margin on revenue, not capital, and that an arguably appropriate measure of industry concentration was the Herﬁndahl. This latter ﬁnding led to a great deal of policy-driven work (for example Dansby and Willig, 1979; Farrell and Shapiro, 1990) and thus may have been one of...
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