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How (Not) to Measure Competition

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  • Boone, J.

    (Tilburg University, School of Economics and Management)

  • van Ours, J.C.

    (Tilburg University, School of Economics and Management)

  • van der Wiel, H.P.

    (Tilburg University, School of Economics and Management)

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.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Boone, J. & van Ours, J.C. & van der Wiel, H.P., 2007. "How (Not) to Measure Competition," Other publications TiSEM 032bda7d-58a6-4c6c-83ac-0, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:032bda7d-58a6-4c6c-83ac-0d1761a5b81b
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    References listed on IDEAS

    as
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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