Simple econometric models often produce results that may be interpreted in different ways. In response to disagreements over how to interpret such models, researchers have begun to apply increasingly sophisticated econometric models and estimation techniques. However, it is not always clear that available data are appropriate for the task presented by the more sophisticated models. In this chapter we address such a problem.

The controversy

One of the key early findings from the PIMS database was the positive effect of market share on business profitability (Buzzell and Gale 1987; Buzzell, Gale, and Sultan 1975). The argument was that higher market share yielded advantages in efficiency and thus resulted in lower average cost. Based on the empirical evidence from PIMS and other studies, such as those with the Federal Trade Commission's Line of Business database (e.g. Ravenscraft 1983), Scherer et al. (1987) contended that the market share effect is “robust,” and a number of analysts and consultants promoted the unbeatable logic of market share building strategies (e.g. Henderson 1979).

However, a number of researchers raised serious questions about the validity of the market share effect. Some pointed out that the observed regularity lacked a theoretical base (e.g. Rumelt and Wensley 1980). In fact, knowledge of such a strategic relationship would force all firms to compete more forcefully for market share, which would eliminate the returns implied by the relationship, unless “isolating mechanisms” existed that limited competition (Wensley 1982).