IDEAS home Printed from https://ideas.repec.org/a/kap/decono/v161y2013i1p45-67.html
   My bibliography  Save this article

When is the Price Cost Margin a Safe Way to Measure Changes in Competition?

Author

Listed:
  • Jan Boone
  • Jan Ours
  • Henry Wiel

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. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Jan Boone & Jan Ours & Henry Wiel, 2013. "When is the Price Cost Margin a Safe Way to Measure Changes in Competition?," De Economist, Springer, vol. 161(1), pages 45-67, March.
    • Handle: RePEc:kap:decono:v:161:y:2013:i:1:p:45-67
    DOI: 10.1007/s10645-012-9196-7
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10645-012-9196-7
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10645-012-9196-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rabah Amir & Val E. Lambson, 2000. "On the Effects of Entry in Cournot Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 235-254.
    2. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    3. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    4. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    5. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    6. Harold Creusen & Bert Minne & Henry van der Wiel, 2006. "Competition in the Netherlands; an analysis of the period 1993-2001," CPB Document 136, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    8. Harold Creusen & Bert Minne & Henry van der Wiel, 2006. "Competition in the Netherlands; an analysis of the period 1993-2001," CPB Document 136.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Reiss, Peter C. & Wolak, Frank A., 2007. "Structural Econometric Modeling: Rationales and Examples from Industrial Organization," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 64, Elsevier.
    10. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    11. van der Wiel, H.P., 2010. "Competition and innovation : Together a tricky rollercoaster for productivity," Other publications TiSEM 2764dae1-3502-4775-82da-f, Tilburg University, School of Economics and Management.
    12. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eric E. O. Opoku & Isabel K. M. Yan & Kate Hynes, 2020. "Reaching up and reaching out: The impact of competition on firms’ productivity and export decisions," Pacific Economic Review, Wiley Blackwell, vol. 25(1), pages 69-101, February.
    2. Xinyu Cai & Marko Milojevic & Denis Syromyatnikov & Anastasia Kurilova & Beata Ślusarczyk, 2021. "Mathematical Interpretation of Global Competition between Payment Systems," Mathematics, MDPI, vol. 9(17), pages 1-18, August.
    3. Duso, Tomaso & Seldeslachts, Jo & Szucs, Florian, 2019. "The Impact of Competition Policy Enforcement on the Functioning of EU Energy Markets," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 40(01), pages 97-120.
    4. Telg, Nina & Lokshin, Boris & Letterie, Wilko, 2023. "How formal and informal intellectual property protection matters for firms' decision to engage in coopetition: The role of environmental dynamism and competition intensity," Technovation, Elsevier, vol. 124(C).
    5. João Amador & Ana Cristina Soares, 2018. "Competition in the Portuguese economy: insights from a profit elasticity approach," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(2), pages 339-365, May.
    6. Giorgia Giovannetti & Enrico Marvasi & Giorgio Ricchiuti, 2019. "Does the Same FDI Fit All? How Competition and Affiliates Characteristics Affect Parents’ Productivity," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 5(3), pages 369-402, October.
    7. Koffi Elitcha, 2021. "The moderating role of stock markets in the bank competition-entrepreneurship relationship," Small Business Economics, Springer, vol. 56(4), pages 1333-1360, April.
    8. Picchio, Matteo & van Ours, Jan C., 2011. "Market imperfections and firm-sponsored training," Labour Economics, Elsevier, vol. 18(5), pages 712-722, October.
    9. Raymond W. & Plotnikova T., 2015. "How does firms' perceived competition affect technological innovation in Luxembourg?," MERIT Working Papers 2015-001, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    10. De Bonis, Riccardo & Marinelli, Giuseppe & Vercelli, Francesco, 2018. "Playing yo-yo with bank competition: New evidence from 1890 to 2014," Explorations in Economic History, Elsevier, vol. 67(C), pages 134-151.
    11. Iryna Okolelova & Jacob A. Bikker, 2022. "The single supervisory mechanism: Competitive implications for the banking sectors in the euro area," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1818-1835, April.
    12. Leon, Florian, 2015. "Does bank competition alleviate credit constraints in developing countries?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 130-142.
    13. Tian, Guangning & Li, Bo & Cheng, Yue, 2022. "Bank competition and corporate financial asset holdings," International Review of Financial Analysis, Elsevier, vol. 84(C).
    14. Misraku Molla Ayalew & Zhang Xianzhi, 2019. "Bank Competition and Access to Finance: Evidence from African Countries," Journal of Industry, Competition and Trade, Springer, vol. 19(1), pages 155-184, March.
    15. Raymond F. D. D. Chaudron & Leo Haan & Marco Hoeberichts, 2023. "Banks’ Net Interest Income from Maturity Transformation and Other Interest Income: Communicating Vessels?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(1), pages 35-62, February.
    16. van Leuvensteijn, Michiel & Huljak, Ivan & de Bondt, Gabe, 2024. "A new measure of firm-level competition: an application to euro area banks," Working Paper Series 2925, European Central Bank.
    17. Michele Benvenuti & Silvia Del Prete, 2019. "A profit elasticity approach to measure banking competition in Italian credit markets," Temi di discussione (Economic working papers) 1237, Bank of Italy, Economic Research and International Relations Area.
    18. Kuessi, Richard & Nantob, N'Yilimon & Aguey, Segnon & Couchoro, Mawuli Kodjovi, 2023. "Competition and banking efficiency in the WAEMU: The role of multinationals and institutions," International Economics, Elsevier, vol. 175(C), pages 45-62.
    19. Brouwer, E. & van der Wiel, H.P., 2010. "Competition and Innovation : Pushing Productivity Up or Down?," Discussion Paper 2010-52, Tilburg University, Center for Economic Research.
    20. Léon, Florian, 2016. "Does the expansion of regional cross-border banks affect competition in Africa? Indirect evidence," Research in International Business and Finance, Elsevier, vol. 37(C), pages 66-77.
    21. Hussain Khan, Habib & Kutan, Ali M., 2023. "Banking sector competition and firms’ financial constraints: Firm-Level evidence from developing economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jan Boone & Henry van der Wiel & J. van Ours, 2007. "How (not) to measure competition," CPB Discussion Paper 91, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Boone, J. & van Ours, J.C. & van der Wiel, H.P., 2007. "How (Not) to Measure Competition," Discussion Paper 2007-32, Tilburg University, Center for Economic Research.
    3. Vahagn Jerbashian & Anna Kochanova, 2017. "The Impact of Telecommunication Technologies on Competition in Services and Goods Markets: Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(3), pages 628-655, July.
    4. Maman Setiawan, 2023. "Measuring the Competition Index in the Indonesian Manufacturing Industry: The Structure–Conduct–Performance Paradigm," Sustainability, MDPI, vol. 15(15), pages 1-13, July.
    5. Huang, Tai-Hsin & Hu, Chu-Nan & Chang, Bao-Guang, 2018. "Competition, efficiency, and innovation in Taiwan’s banking industry — An application of copula methods," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 362-375.
    6. Ugur, Mehmet & Solomon, Edna & Zeynalov, Ayaz, 2022. "Leverage, competition and financial distress hazard: Implications for capital structure in the presence of agency costs," Economic Modelling, Elsevier, vol. 108(C).
    7. Thomas Strobel, 2012. "New evidence on the sources of EU countries’ productivity growth—industry growth differences from R&D and competition," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 39(3), pages 293-325, August.
    8. Doan, Tinh & Stevens, Philip, 2012. "Evolution of competition in Vietnam industries over the recent economic transition," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-24.
    9. Anderton, Robert & Di Lupidio, Benedetta & Jarmulska, Barbara, 2020. "The impact of product market regulation on productivity through firm churning: Evidence from European countries," Economic Modelling, Elsevier, vol. 91(C), pages 487-501.
    10. Devin Garcia & Levent Kutlu & Robin C. Sickles, 2022. "Market Structures in Production Economics," Springer Books, in: Subhash C. Ray & Robert G. Chambers & Subal C. Kumbhakar (ed.), Handbook of Production Economics, chapter 13, pages 537-574, Springer.
    11. Roberto Alvarez & Rolando Campusano, 2014. "Does Competition Spur Innovation in Developing Countries?," Working Papers wp388, University of Chile, Department of Economics.
    12. Carlo Altomonte & Marcella Nicolini & Armando Rungi & Laura Ogliari, 2010. "Assessing the Competitive Behaviour of Firms in the Single Market: A Micro-based Approach," European Economy - Economic Papers 2008 - 2015 409, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    13. Alena Zemplinerova, 2010. "Competition policy and economic analysis: What can we learn from firm and industry data?," CERGE-EI Books, The Center for Economic Research and Graduate Education - Economics Institute, Prague, edition 1, number b07, May.
    14. Matthew Backus, 2020. "Why Is Productivity Correlated With Competition?," Econometrica, Econometric Society, vol. 88(6), pages 2415-2444, November.
    15. Boone, J. & Goeree, J.K., 2010. "Optimal Market Design," Other publications TiSEM ef8ba09b-1e3f-4a7d-aa66-d, Tilburg University, School of Economics and Management.
    16. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    17. Ansari, Jugnu, 2012. "A New Measure of Competition in Indian Loan Market," MPRA Paper 50108, University Library of Munich, Germany.
    18. Norbäck, Pehr-Johan & Persson, Lars, 2012. "Entrepreneurial innovations, competition and competition policy," European Economic Review, Elsevier, vol. 56(3), pages 488-506.
    19. Juan A. Correa & Carmine Ornaghi, 2014. "Competition & Innovation: Evidence from U.S. Patent and Productivity Data," Journal of Industrial Economics, Wiley Blackwell, vol. 62(2), pages 258-285, June.
    20. Koski, Heli & Pajarinen, Mika, 2013. "Empirical Evaluation of the Effectiveness of Competition Policy," ETLA Working Papers 15, The Research Institute of the Finnish Economy.

    More about this item

    Keywords

    Competition; Profit elasticity; Price cost margin; Measures of competition; Concentration; D43; L13;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:decono:v:161:y:2013:i:1:p:45-67. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.