This paper by Richard Schmalensee examines the contributions of firm, industry, and market share differences to cross-section variability in business unit profitability using 1975 FTC Line-of-Business data. The study finds that firm differences are statistically insignificant, while industry differences are significant and account for over 75% of the variance in industry average rates of return. Market share effects are statistically significant but account for less than 1% of the variance in business unit rates of return. The industry effects are negatively correlated with market share, suggesting that more concentrated industries have lower profitability. The study highlights the importance of industry-level analysis and the need to consider the negative correlation between market share and industry effects. The findings support the classical focus on industry-level analysis and suggest that persistent firm-level profitability differences may be traceable to business unit or industry-level factors.This paper by Richard Schmalensee examines the contributions of firm, industry, and market share differences to cross-section variability in business unit profitability using 1975 FTC Line-of-Business data. The study finds that firm differences are statistically insignificant, while industry differences are significant and account for over 75% of the variance in industry average rates of return. Market share effects are statistically significant but account for less than 1% of the variance in business unit rates of return. The industry effects are negatively correlated with market share, suggesting that more concentrated industries have lower profitability. The study highlights the importance of industry-level analysis and the need to consider the negative correlation between market share and industry effects. The findings support the classical focus on industry-level analysis and suggest that persistent firm-level profitability differences may be traceable to business unit or industry-level factors.