An empirical illustration of an alternative approach to measuring the market power and high profits hypothesis

This paper discusses the problems of testing the structure-profit relationship, and presents an alternative approach to measuring the market power and profitability hypothesis. The results from an empirical study on firm level indicate that firms in a monopoly situation can maintain a high profitability, if and only if there are extensive barriers to entry. There seems, however, not to be a general linear relationship between concentration and profitability, which has been a common assumption in many empirical studies in this area.