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

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  • J.A. Bikker
  • S. Shaffer
  • L. Spierdijk

Abstract

The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifcations 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. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample covering more than 110,000 bank-year observations on almost 18,000 banks in 67 countries during 1986-2004.

Suggested Citation

  • J.A. Bikker & S. Shaffer & L. Spierdijk, 2009. "Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium," Working Papers 09-27, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:0927
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    More about this item

    Keywords

    Panzar-Rosse test; competition; firm size;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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