DP4330 A New Way to Measure Competition
|Publication Date:||March 2004|
|Keyword(s):||competition, measures of competition, price cost margin, variable profits|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4330|
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.