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How (not) to measure competition

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Author Info
Boone, Jan
van der Wiel, Henry
van Ours, Jan C

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6275.

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Date of creation: May 2007
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Handle: RePEc:cpr:ceprdp:6275

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Related research
Keywords: competition; concentration; measures of competition; price cost margin; profit elasticity; profits;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anna Lovasz, 2008. "Competition and the Gender Wage Gap: New Evidence from Linked Employer-Employee Data in Hungary 1986-2003," Budapest Working Papers on the Labour Market 0804, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
  2. Heyman, Fredrik & Svaleryd, Helena & Vlachos, Jonas, 2008. "Competition, Takeovers and Gender Discrimination," Working Paper Series 734, Research Institute of Industrial Economics. [Downloadable!]
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  3. Ferdinand Rauch, 2008. "An explanation for the inverted-U relationship between competition and innovation," Vienna Economics Papers 0813, University of Vienna, Department of Economics. [Downloadable!]
  4. Harold Creusen & Bert Minne & Henry van der Wiel, 2006. "Competition in the Netherlands," CPB Documents 136, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  5. Nillesen, P. & Pollitt, M.G., 2008. "Ownership unbundling in electricity distribution: empircal evidence from New Zealand," Cambridge Working Papers in Economics 0836, Faculty of Economics, University of Cambridge. [Downloadable!]
  6. Alex Coad, 2008. "Firm growth and scaling of growth rate variance in multiplant firms," Economics Bulletin, Economics Bulletin, vol. 12(9), pages 1-15. [Downloadable!]
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