Industry Classification and The Relationship between Profitability and Competition: A Study of The US Manufacturing Industry

Abstract: This paper examines how the relationship between profitability and competition changes with narrowing industry classification⁠—and what implications that carries for policy makers and future antitrust laws. The sample is comprised of panel data for 1178 US manufacturing firms between 2002 and 2012, covering approximately 26% of the total market capitalization and 19% of all public businesses in the US for 2012. Four measures of competition are used to cover and cross-validate the research question; the number of firms, market share, market concentration and the Herfindahl-Hirschman index. Results offer weak evidence that (i) profitability decreases with competition, and (ii) explanatory power between firm profitability and market competition increases with narrowing industry classification. Additionally, profitability is shown to increase with lagged profitability, firm growth and productivity, and decrease with leverage and financial stress.