Long-run di¤erentials in interindustrial pro...tability are relevant for several areas of theoretical and applied economics because they characterize the overall nature of competition in a capitalist economy. This paper argues that the existing empirical models of competition in the industrial organization literature su¤er from serious ‡aws. An alternative framework, based on recent advances in the econometric modeling of the long run, is developed for estimating the size of long-run pro...t

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... e di¤erentials. It is shown that this framework generates separate, industry-speci...c estimates of two potential components of long-run pro...t rate di¤erentials identi...ed in economic theory. One component, the noncompetitive di¤erential, stem from factors that do not depend directly on the state of competition; these factors are generally characterized as risk and other premia. The other component, the competitive di¤erential, is due to factors that directly depend on the state of competition (factors such as degree of concentration and economies of scale). Estimates provided here show that during the period under study, the group of industries with statistically insigni...cant competitive di¤erentials accounted for 72 percent of manufacturing pro...ts and 75 percent of manufacturing capital stock, which is interpreted as lending support to the theories of competition advanced by the classical economists and their modern followers.