DP2636 Competition

Author(s): Jan Boone
Publication Date: December 2000
Keyword(s): Competition, Concentration, Measures Of Competition, Price Cost Margin, Profits
JEL(s): D43, L13
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2636

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.