2007-09-02 papers

on Industrial Organization

Issue of 2007–09–02
two papers chosen by
Kwang Soo Cheong, Johns Hopkins University

How (Not) to Measure Competition By Boone, J.; Ours, J.C. van; Wiel, H.P. van der
Maverick Firms: An Exploratory Analysis of Mortgage Providers in Australia By Robert Breunig & Flavio Menezes

By:	Boone, J.; Ours, J.C. van; Wiel, H.P. van der (Tilburg University, Center for Economic Research)
Abstract:	We introduce a new measure of competition: the elasticity of a firm?s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.
Keywords:	competition;profit elasticity;measures of competition;concentration;price cost margin;profits
JEL:	D43 L13
Date:	2007
URL:	https://d.repec.org/n?u=RePEc:dgr:kubcen:200732

Maverick Firms: An Exploratory Analysis of Mortgage Providers in Australia

By:	Robert Breunig & Flavio Menezes (School of Economics, The University of Queensland)
Abstract:	This paper develops an empirical strategy to measure maverick-like behaviour. It applies the strategy to a dataset that contains interest rates charged by mortgage providers in Australia from January 2003 to October 2006. The Reserve Bank of Australia raised its cash rate five times in this period, which provides a natural setting to observe suppliers’ responses. We examine suppliers’ behaviour both in terms of the rates they charge and the time it takes them to change their rates as a response to a systemic increase in costs. These empirical observations suggest that the development of a theory for maverick behaviour be focused on dynamic, asymmetric models and informed by institutions and market dynamics that are relevant to the case at hand.
URL:	https://d.repec.org/n?u=RePEc:qld:uq2004:348

This issue is ©2007 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.

General information on the NEP project can be found at https://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.

NEP’s infrastructure is sponsored by the Griffith Business School of Griffith University in Australia.