Working Paper: CEPR ID: DP2636
Authors: Jan Boone
Abstract: Competition has been modelled in economic literature in a number of ways. What do these different parameterizations of competition have in common? For instance, it turns out that it is not always the case that a rise in competition reduces price cost margins, industry wide profits or concentration. All parameterizations of competition, considered here, have two features in common. First, the reallocation effect: a rise in competition raises the profits of a firm relative to the profits of a less efficient firm. Second, a rise in competition reduces the profits of the least efficient firm active in the industry.
Keywords: competition; concentration; measures of competition; price cost margin; profits
JEL Codes: D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of the euro (F36) | increase in competition (L13) |
| increase in competition (L13) | reallocation of profits from inefficient firms to efficient firms (D61) |
| increase in competition (L13) | higher relative profits for efficient firms (D22) |
| increase in competition (L13) | steeper mapping of cost differences to profit differences (D40) |
| increase in competition (L13) | significant drop in profits for firms with higher marginal costs (D21) |