Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium

Jacob A. Bikker, Sherrill Shaffer, Laura Spierdijk

Research output: Contribution to journalArticleAcademicpeer-review

141 Citations (Scopus)

Abstract

The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium to infer the degree of competition. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample containing more than 100,000 bank-year observations on more than 17,000 banks in 63 countries during the years 1994 to 2004.
Original languageEnglish
Pages (from-to)1025-1044
JournalReview of Economics and Statistics
Volume94
DOIs
Publication statusPublished - 2012
Externally publishedYes

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