The Relationship among Profitability Index, Concentration Ratio, and Economies of Scale in Iranian Manufacturing Industries

In this study the market structure of industrial sector has been evaluated based on the index of economies of scale, Herfindahl – Hirschman concentration index, and Lerner concentration index. Also, the relationship among profitability index and indexes of concentration ratio and economies of scale has been examined. Data used include the information of input and output of the components of cost function, market share of industries, number of firms, and the output price related to 23 industries of ISIC 2-digit code for the period 1996-2009. The result of evaluation of concentration ratio based on the Lerner and Herfindahl indexes indicates that the concentration level has declined during the period under study, while the industry sector has been away from competitive situation. In addition, the elasticity of cost with respect to output is less than unit for all of the industries implying the existence of economies of scale for 23 industries. The most important finding of this study is that the profitability index of industry sector is less than 50% and equal to 38% and the Lerner index and economies of scale are able to explain 52% of variations in profitability index of whole industry. Also, the Lerner index has relative superiority in the explanation of profitability index compared with Herfindahl – Hirschman concentration index.