Working Paper: CEPR ID: DP8159
Authors: Jan Boone; Michiel van Leuvensteijn
Abstract: The Profit Elasticity (PE) is a new competition measure introduced in Boone (2008). So far, there was no direct proof that this measure can identify regimes of competition empirically. This paper focuses on this issue using data of Genesove and Mullin (1998) in which different regimes of competition are identified. We derive a version of PE suitable for this data set. This competition measure correctly classifies the monopoly/cartel regime as being less competitive than both the price war regime and break-up of cartel regime.
Keywords: competition; measures of competition; price-cost margin; profit elasticity
JEL Codes: D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| profit elasticity (PE) (D22) | classification of monopoly-cartel regime as less competitive (L12) |
| price war regime (L11) | higher competition intensity (L13) |
| breakup of cartel regime (P39) | higher competition intensity (L13) |
| monopoly-cartel regime (L12) | lower profits compared to price war regime (L11) |
| monopoly-cartel regime (L12) | lower profits compared to breakup of cartel regime (L49) |
| price of raw sugar (Q11) | parameters associated with competition levels differ significantly from zero (L11) |
| Wald test (C52) | supports assertion of less intense competition during monopoly-cartel regime (L12) |