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Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium

  • Jacob A. Bikker

    (De Nederlandsche Bank and Utrecht School of Economics, University of Utrecht)

  • Sherrill Shaffer

    (University of Wyoming and Centre for Applied Macroeconomic Analysis, Australian National University)

  • Laura Spierdijk

    (University of Groningen)

The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium to infer the degree of competition. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample containing more than 100,000 bank-year observations on more than 17,000 banks in 63 countries during the years 1994 to 2004. © 2012 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 94 (2012)
Issue (Month): 4 (November)
Pages: 1025-1044

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Handle: RePEc:tpr:restat:v:94:y:2012:i:4:p:1025-1044
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