A Test of the Quality of Concentration Indices

17 Pages Posted: 19 Sep 2008

See all articles by Diana Heger

Diana Heger

IHS Economics

Kornelius Kraft

University of Dortmund - Department of Economics; IZA Institute of Labor Economics

Date Written: 2008

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.

Keywords: Concentration Indices, Profitability, Discrete Regression Models

JEL Classification: L13, L25, C25

Suggested Citation

Heger, Diana and Kraft, Kornelius, A Test of the Quality of Concentration Indices (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-072, Available at SSRN: https://ssrn.com/abstract=1268227 or http://dx.doi.org/10.2139/ssrn.1268227

Diana Heger (Contact Author)

IHS Economics ( email )

Bleichstr. 1
Frankfurt/Main
Germany

Kornelius Kraft

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany
+49 231 755-3152 (Phone)
+49 231 755-3155 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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