Collusion versus Differential Efficiency: Testing Alternative Hypotheses.

The predictions of collusion- and efficiency-based static equilibrium explanations of interindustry profitability differences are formally developed and tested, using appropriate econometric techniques, with intraindustry data on seventy U.S. Internal Revenue Service minor manufacturing industries in 1963 and 1972. None of the explanations has much explanatory power. The 1963 data are consistent with collusion-based models, while the 1972 data are inconsistent with all non-null hypotheses considered. Patterns of profitability are sharply different in the two years, in complex ways apparently unrelated to cyclical forces or the Phase II price controls. Implications of these results are discussed. Copyright 1987 by Blackwell Publishing Ltd.