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When is the Price Cost Margin a Safe Way to Measure Changes in Competition?

  • Jan Boone

    ()

  • Jan Ours

    ()

  • Henry Wiel

    ()

The price cost margin (PCM) is a popular way to measure competition. Although we know that this measure is not without problems, we actually do not know how often and under which conditions a change in PCM points in the wrong direction. We use a new competition measure, the profit elasticity, which is more robust than PCM. Our empirical analysis based on Dutch data shows that when competition changes the probability that PCM points in the wrong direction increases with industry concentration. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s10645-012-9196-7
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Article provided by Springer in its journal De Economist.

Volume (Year): 161 (2013)
Issue (Month): 1 (March)
Pages: 45-67

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Handle: RePEc:kap:decono:v:161:y:2013:i:1:p:45-67
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100260

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  1. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
  2. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  3. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
  4. Aviv Nevo, 2003. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Microeconomics 0303006, EconWPA.
  5. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," NBER Working Papers 11555, National Bureau of Economic Research, Inc.
  6. Boone, J., 2004. "A New Way to Measure Competition," Discussion Paper 2004-31, Tilburg University, Center for Economic Research.
  7. van der Wiel, H.P., 2010. "Competition and innovation : Together a tricky rollercoaster for productivity," Other publications TiSEM 2764dae1-3502-4775-82da-f, Tilburg University, School of Economics and Management.
  8. Rabah Amir & Val E. Lambson, 1998. "On the Effects of Entry in Cournot Markets," CIE Discussion Papers 1998-06, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  9. Harold Creusen & Bert Minne & Henry van der Wiel, 2006. "Competition in the Netherlands; an analysis of the period 1993-2001," CPB Document 136, CPB Netherlands Bureau for Economic Policy Analysis.
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