Abstract
The price cost margin (PCM) is a popular way to measure competition. Although we know that this measure is not without problems, we actually do not know how often and under which conditions a change in PCM points in the wrong direction. We use a new competition measure, the profit elasticity, which is more robust than PCM. Our empirical analysis based on Dutch data shows that when competition changes the probability that PCM points in the wrong direction increases with industry concentration.
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This paper is a revised version of the paper previously entitled “How (not) to measure competition”. Financial support from NWO (grant numbers 453-07-003 and 472.04.031) is gratefully acknowledged. The data analysis reported in this document was carried out at the Center for Policy Related Statistics of Statistics Netherlands. The views expressed in this document are those of the authors and do not necessarily reflect the policy of Statistics Netherlands. We thank Harold Creusen, Marc Duhamel, Free Huizinga, Lapo Filistrucchi, Maarten Pieter Schinkel, seminar participants at ACLE, CCP, Ente Einaudi, Industry Canada, NMa, University of Nottingham, participants at the NIE Christmas conference at UEA and two anonymous referees for useful comments and suggestions.
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Boone, J., van Ours, J.C. & van der Wiel, H. When is the Price Cost Margin a Safe Way to Measure Changes in Competition?. De Economist 161, 45–67 (2013). https://doi.org/10.1007/s10645-012-9196-7
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DOI: https://doi.org/10.1007/s10645-012-9196-7