On the specification of structure-performance relationships

This paper argues that most estimated structure-profitability equations in industrial economics have not been derived from a single coherent view of the behaviour of firms. The independent variables in such equations have often been derived on the basis of a literature search and by appeal to conflicting approaches (e. g. constrained and unconstrained profit maximisation). The use of a coherent approach indicates that structure-performance equations are likely to be highly non-linear, and that simultaneous equation estimation is neither required nor appropriate. In some cases single-equation estimation is adequate, and in other cases reduced form equations are needed.