How (not) to measure competition

Jan Boone, Jan van Ours () and Henry van der Wiel ()

CPB Discussion Papers 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.

Keywords: competition; profit elasticity; measures of competition; concentration; price cost margin; profits (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-ind and nep-mic
Date: 2007-12
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http://www.cpb.nl/eng/pub/cpbreeksen/discussie/91/disc91.pdf (application/pdf)

Related works:
Working Paper: How (Not) to Measure Competition (2007)
Working Paper: How (Not) to Measure Competition (2007)
Working Paper: How (not) to measure competition (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:cpb:discus:91

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