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How (Not) to Measure Competition

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  • Boone, J.
  • Ours, J.C. van
  • Wiel, H.P. van der

    (Tilburg University, Tilburg Law and Economics Center)

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 competi- tion. 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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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2007-014.

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Date of creation: 2007
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Handle: RePEc:dgr:kubtil:2007014

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Web page: https://www.tilburguniversity.edu/research/institutes-and-research-groups/center-ar/

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

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References

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