How (not) to measure competition

Jan Boone (), Henry van der Wiel and Jan van Ours
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Jan Boone: CPB Netherlands Bureau for Economic Policy Analysis

No 91, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: We discuss and apply a new measure of competition: the elasticity of a firm's profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competition. Using firm level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high relevance for competition policy and regulation. So, just when it is needed the most PCM fails whereas PE does not. From this, we conclude that PE is a more reliable measure of competition.

JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-ind and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (96)

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