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A Test of the Quality of Concentration Indices

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  • Heger, Diana
  • Kraft, Kornelius

Abstract

Theory predicts a positive relationship between market concentration and profitability in most scenarios. In empirical work, however, this relation is frequently not found or only a weak connection is observed. We compare the performance of concentration and market share variables, which are generated on the basis of the official industry classification, with information collected directly from firms. Information from companies on the number of competitors, their relative size and the intensity of price competition is highly significant in explaining profit levels, while none of the concentration indices performs well. Hence, the poor quality of industry data is responsible for the loose connection that is usually found between concentration and profitability.

Suggested Citation

  • Heger, Diana & Kraft, Kornelius, 2008. "A Test of the Quality of Concentration Indices," ZEW Discussion Papers 08-072, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:7415
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    References listed on IDEAS

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    1. Dirk Czarnitzki & Kornelius Kraft, 2010. "On the profitability of innovative assets," Applied Economics, Taylor & Francis Journals, vol. 42(15), pages 1941-1953.
    2. Neumann, Manfred & Bobel, Ingo & Haid, Alfred, 1979. "Profitability, Risk and Market Structure in West German Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 227-242, March.
    3. Slade, Margaret E., 2004. "Competing models of firm profitability," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 289-308, March.
    4. Claude d'Aspremont & Alexis Jacquemin & Jean Jaskold Gabszewicz & John A. Weymark, 1983. "On the Stability of Collusive Price Leadership," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 17-25, February.
    5. Czarnitzki, Dirk & Kraft, Kornelius, 2004. "Innovation indicators and corporate credit ratings: evidence from German firms," Economics Letters, Elsevier, vol. 82(3), pages 377-384, March.
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    Cited by:

    1. Rexhäuser, Sascha & Rammer, Christian, 2011. "Unmasking the Porter hypothesis: Environmental innovations and firm-profitability," ZEW Discussion Papers 11-036, ZEW - Leibniz Centre for European Economic Research.
    2. Sascha Rexhäuser & Christian Rammer, 2014. "Environmental Innovations and Firm Profitability: Unmasking the Porter Hypothesis," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(1), pages 145-167, January.
    3. Anja Schmiele, 2008. "Drivers and Effects of Internationalising Innovation by SMEs," Working Papers id:1547, eSocialSciences.
    4. Rammer, Christian & Schmiele, Anja, 2008. "Drivers and Effects of Internationalising Innovation by SMEs," ZEW Discussion Papers 08-035 [rev.], ZEW - Leibniz Centre for European Economic Research.
    5. Katja Görlitz & Joel Stiebale, 2011. "The Impact of Product Market Competition on Employers’ Training Investments. Evidence from German Establishment Panel Data," De Economist, Springer, vol. 159(1), pages 1-23, March.

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    More about this item

    Keywords

    Concentration Indices; Profitability; Discrete Regression Models;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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