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How (Not) to Measure Competition

Author

Listed:
  • Boone, J.

    (Tilburg University, Center For Economic Research)

  • van Ours, J.C.

    (Tilburg University, Center For Economic Research)

  • van der Wiel, H.P.

    (Tilburg University, Center For Economic Research)

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.

Suggested Citation

  • Boone, J. & van Ours, J.C. & van der Wiel, H.P., 2007. "How (Not) to Measure Competition," Discussion Paper 2007-32, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:032bda7d-58a6-4c6c-83ac-0d1761a5b81b
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    References listed on IDEAS

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    More about this item

    Keywords

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

    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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