Measuring Competition
By Chris Dillow
“[C]ompetition economists have known for some time – that you cannot necessarily measure competition by the number of firms in an industry: the Herfindahl index, for example, can be a bad measure.
. . .
But if you cannot measure competition by the number of firms, how can you?
One alternative, proposed (pdf) by Jan Boone, is profits elasticity. The idea here is that if profits fall sharply in response to a rise in marginal costs then the industry is competitive but if they don’t then it isn’t. A competitive market is one which punishes inefficiency.”
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