"Competing Models of Firm Profitability"
JEL codes: D43, G13, L13, L71
Keywords: Firm profits, market structure, market share, risk premia, resource exhaustion, principal components.
Abstract: In this paper, I look at four models of firm profitability: two taken from Industrial Organization, one from Finance, and one from the Economics of Exhaustible Resources. Only one predicts that there will be a positive relationship between firm profitability and the structure of the market in which the firm operates, and only that one views high profits as an indication of monopoly power. Nevertheless, most antitrust authorities base their policies on a belief in those relationships. Using panel data from 14 nonferrous--metal mining and refining markets, I find strong empirical support only for the market--structure model.