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A Test of the Quality of Concentration Indices

Diana Heger and Kornelius Kraft ()

No 08-072, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: Theory predicts a positive relationship between market concentration and profitability in most scenarios. In empirical work, however, this relation is frequently not found or only a weak connection is observed. We compare the performance of concentration and market share variables, which are generated on the basis of the official industry classification, with information collected directly from firms. Information from companies on the number of competitors, their relative size and the intensity of price competition is highly significant in explaining profit levels, while none of the concentration indices performs well. Hence, the poor quality of industry data is responsible for the loose connection that is usually found between concentration and profitability.

Keywords: Concentration Indices; Profitability; Discrete Regression Models (search for similar items in EconPapers)
JEL-codes: L25 L13 C25 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-com and nep-ind
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:7415

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