Edwin McDowell is publishing correspondent for The New York Times. Holding an annual children's book fair is a social and commercial ritual as hallowed in many elementary schools in the United States as the selling of cookies by Girl Scouts. After weeks of anticipation, youngsters are paraded into the school gymnasium or auditorium and allowed to browse among attractive displays of paperback books in collapsible metal racks and stalls. The children are encouraged to buy as many books as parental budgets will allow. While at some schools parents are invited to come and make purchases too, the book fair is largely an experience of independence and free choice for children.

For schools, it is both a way of raising money to supplement budgets and of promoting reading. ''It's a wonderfully effective way of reaching kids directly with books, including many kids who don't ordinarily buy books or read them,'' said Doris Bass, director of school and college sales for Bantam Books. It is also a large and profitable business dominated by three companies: Educational Reading Service Book Fairs, Inc., a privately owned company in Mahwah, N.J.; Scholastic Inc., the giant New York publisher, and Book Fairs Services of Columbus, Ohio. In addition, 25 to 30 regional companies put on book fairs, as do a scattered number of bookstores. It is a highly competitive and very secretive industry, but Educational Reading Service and Scholastic are said to do about 10,000 book fairs a year.

The typical book fair lasts three to five days and is aimed at children from kindergarten through sixth grade. Most are sponsored by parent-teacher organizations, but many are sponsored by librarians. The book fair company transports books to schools a few days before the big event, often in its own trucks, and hauls them back to its warehouses after the fair. School volunteers unpack books, set up displays, return unsold books and collect money where teachers are prohibited by law from handling funds.

The typical book fair grosses only about $1,500 for the sale of paperbacks costing between 75 cents and $3.95, and most schools get only 20 to 33 percent of the gross. Annunciation School in Washington, D.C., gets 20 percent, which in its case comes to at least $400. Abby Hunt, the librarian, has sponsored six book fairs at Annunciation, a racially and economically mixed parochial school with 250 students in eight grades. ''It's earning money the hard way,'' she said, ''but it's absolutely worthwhile. Bake sales are 100 percent profit because the baked goods are donated, but here you're promoting reading.''