Measuring Competition

38 Pages Posted: 25 Nov 2008  

Rachel Griffith

Institute for Fiscal Studies (IFS); University of Manchester; Centre for Economic Policy Research (CEPR)

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

Rupert Harrison

Institute for Fiscal Studies (IFS)

Date Written: August 22, 2005

Abstract

We investigate the empirical usefulness of a new measure of the degree of competition in a market, proposed by Boone (2000). This measure is based on the reduction in profits that firms experience as a result of cost inefficiencies. We compare this with measures commonly used by policy makers and in empirical work - market shares, concentration indices, the Herfindahl index and price cost margins. Using simulated data we show that in markets where goods are symmetrically differentiated, and where firms differ in their marginal cost, traditional measures can be poor indicators of the degree of competition, while the new relative profits measure performs better. Using accounting data on UK firms we investigate the relationship between the relative profits measure and traditional measures. Our results suggest that concentration-based measures perform worst, while the relative profits measure may provide a useful empirical complement to price-cost margins in both policy and econometric analysis.

Suggested Citation

Griffith, Rachel and Boone, Jan and Harrison, Rupert, Measuring Competition (August 22, 2005). Advanced Institute of Management Research Paper No. 022. Available at SSRN: https://ssrn.com/abstract=1307004 or http://dx.doi.org/10.2139/ssrn.1307004

Rachel Griffith (Contact Author)

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

HOME PAGE: http://www.ifs.org.uk/people/profile?id=37

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jan Boone

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2399 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Rupert Harrison

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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