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De Economist

, Volume 161, Issue 1, pp 45–67 | Cite as

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

  • Jan Boone
  • Jan C. van Ours
  • Henry van der Wiel
Article

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.

Keywords

Competition Profit elasticity Price cost margin Measures of competition Concentration 

JEL Classification

D43 L13 

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  • Jan Boone
    • 1
    • 2
    • 3
    • 4
    • 5
  • Jan C. van Ours
    • 2
    • 4
    • 5
    • 6
    • 7
    • 8
  • Henry van der Wiel
    • 9
  1. 1.Department of EconomicsTilburg UniversityTilburgThe Netherlands
  2. 2.CentERTilburgThe Netherlands
  3. 3.TILECTilburgThe Netherlands
  4. 4.IZABonnGermany
  5. 5.CEPRLondonUK
  6. 6.Department of EconomicsTilburg UniversityTilburgThe Netherlands
  7. 7.Department of EconomicsUniversity of MelbourneMelbourneAustralia
  8. 8.CESifoMunchenGermany
  9. 9.CPBThe HagueThe Netherlands

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