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A Test of the Quality of Concentration Indices

  • Heger, Diana
  • Kraft, Kornelius

Theory predicts a positive relationship between market concentration and profitability in most scenarios. In empirical work, however, this relation is frequently not found or only a weak connection is observed. We compare the performance of concentration and market share variables, which are generated on the basis of the official industry classification, with information collected directly from firms. Information from companies on the number of competitors, their relative size and the intensity of price competition is highly significant in explaining profit levels, while none of the concentration indices performs well. Hence, the poor quality of industry data is responsible for the loose connection that is usually found between concentration and profitability.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 08-072.

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Date of creation: 2008
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Handle: RePEc:zbw:zewdip:7415
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  1. Dirk Czarnitzki & Kornelius Kraft, 2010. "On the profitability of innovative assets," Applied Economics, Taylor & Francis Journals, vol. 42(15), pages 1941-1953.
  2. Neumann, Manfred & Bobel, Ingo & Haid, Alfred, 1979. "Profitability, Risk and Market Structure in West German Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 227-42, March.
  3. d'ASPREMONT, Claude & JACQUEMIN, Alexis & GABSZEWICZ, Jean J. & WEYMARK, John A., . "On the stability of collusive price leadership," CORE Discussion Papers RP -522, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Czarnitzki, Dirk & Kraft, Kornelius, 2004. "Innovation indicators and corporate credit ratings: evidence from German firms," Economics Letters, Elsevier, vol. 82(3), pages 377-384, March.
  5. Slade, Margaret E., 2004. "Competing models of firm profitability," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 289-308, March.
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