Competition

Abstract

Competition has been modelled in the literature in a number of ways. What do these different parametrizations 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 parametrizations 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.

Keywords: competition, measures of competition, concentration, price cost margin, profits

JEL Classification: D43, L13