Working Paper: CEPR ID: DP4330
Authors: Jan Boone
Abstract: This Paper introduces a new way to measure competition based on firms' profits. Within a general model, we derive conditions under which this measure is monotone in competition, where competition can be intensified both through a fall in entry barriers and through more aggressive interaction between players. The measure is shown to be theoretically more robust than the price cost margin. This allows for an empirical test of the problems associated with the price cost margin as a measure of competition.
Keywords: competition; measures of competition; price cost margin; variable 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 |
|---|---|
| Increase in competition (L13) | Increase in Relative Profit Differences (RPD) (D33) |
| Decrease in entry barriers (D43) | Increase in competition (L13) |
| More aggressive firm interactions (L14) | Increase in competition (L13) |
| Increase in competition (L13) | Reallocation of output from less efficient to more efficient firms (D61) |
| Reallocation of output from less efficient to more efficient firms (D61) | Increase in Relative Profit Differences (RPD) (D33) |