On profitability and industrial concentration in Pakistan

Non-inclusion of an important element of market structure in the profitability equation by earlier writers might have caused their estimates to suffer from specification error due to an omitted variable. We have tried to formulate a more comprehensive model in which elasticity of demand, advertising and concentration capture market structure, while the supply side has been incorporated by including productivity. Other factors used to explain the degree of monopoly are capital intensity, advertising and trade. Our results indicate that the main determinants of the profit margin are capital intensity, rising productivity and industrial concentration. We find that there was some dilution due to competition from foreign trade, but its impact has been swayed by other factors.