How (not) to measure competition

Jan C. van Ours, Jan Boone and Henry Wiel

No 6275, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We introduce 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 policy relevance. 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.

Keywords: Competition; Concentration; Measures of competition; Price cost margin; Profit elasticity; Profits (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2007-05
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 (90)

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