Why is it that industries as diverse as groceries and aircraft manufacturing have really low margins while things like pharmaceuticals or software often have high margins? There doesn't seem to be any consistent reason.
Why do profit margins vary so wildly between industries?
byu/Marquis_Horizon inAskEconomics
Posted by Marquis_Horizon
1 Comment
as a rule of thumb, higher markups will happen because of better product differentiation, inelastic demand, barriers to entry, and market power writ large, and low production costs.
however, while markups over marginal cost will vary a ton between industries, but returns on invested capital will be less varied. for instance, walmart has famously low margins on its products, but it turns over its inventory a ton, so it ends up being a very profitable business. markups over production cost for pharma are very high, but they sink a ton of money into R&D and advertising and all the products that don’t work. pharma makes all its money on its winners, essentially. since you’d expect rates of profit to converge across industries, industries with higher risks and higher startup costs should see higher markups to compensate.