Review of Industrial Organization 12: 203–218, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Testing the Competitive Environment and the
Persistence of Proﬁts Hypotheses
CONSTANTINE A. BOURLAKIS
Leicester University Management Centre, University Road, Leicester, LE1 7RH, U.K.
Abstract. In the present paper I examine Brozen’s (1970, 1971a, b, c, 1982) Competitive Environment
Hypothesis and Mueller’s (1977) Persistence of Proﬁts Hypothesis in the Greek manufacturing
industries between 1958 and 1984. The analysis reveals a positive (market power) association between
past and current price-cost margins, although a considerable scrambling in the ranks of price-cost
margins takes place over time. A high concentration and high barriers to entry sub-sample of markets
examined, showed a general reduction in concentration, barriers to entry and a mobility in price-cost
margins ranks, indicating that disciplinary competitive forces are also at work within manufacturing
Key words: Competitive environment, market power, persistence of proﬁts, concentration, Greek
In the present paper I examine the competitive process in the Greek manufacturing
industries by investigating the intertemporal behaviour of proﬁts in the domestic
market. My approach in the examination of the competitive process involves the
testing of two competing hypotheses: The Competitive Environment Hypothesis
and the Persistence of Proﬁts Hypothesis. The ﬁrst hypothesis is associated with
Brozen’s (1970, 1971a, b, c, 1982) work and states that excess proﬁts accruing in
concentrated markets represent a disequilibrium – and thus temporary – phenom-
enon and, as a result, the correlation between concentration and proﬁts should be
erratic over time. The persistence of proﬁt hypothesis (Mueller, 1977) claims that
proﬁts are not independent of their initial level and do not converge over time on
the competitive rate of return, since erected barriers or strategic behaviour by the
incumbent ﬁrms impede entry.
The empirical part of this paper tests Mueller’s (1977) persistence of proﬁts –
market power hypothesis versus Brozen’s (1970, 1971a, b, c, 1982) disequilibrium
hypothesis between 1958 and 1984 across twenty 2-digit manufacturing classes
and eighty-ﬁve 3-digit manufacturing groups in Greece. Statistically signiﬁcant
I am grateful to two anonymous referees and to Bruce Lyons for their valuable comments. I would
also like to thank the participants of the 21st Annual Conference of the European Association for
Research in Industrial Economics (E.A.R.I.E.), 4–6th September, 1994, University of Crete, Chania,
Greece, for constructive comments received. The usual disclaimer applies.