Measuring the Deviations from Perfect Competition: International Evidence (second version)

Razzak, Weshah (2024): Measuring the Deviations from Perfect Competition: International Evidence (second version).

Abstract

We use aggregated macroeconomic data for 43 countries plus the EU19 and EU27 from 1970 to 2022 to test the microeconomic condition for Perfect Competition, whereby the price level is equal to the marginal cost in the long run. We postulate two forms of Perfect Competition in the macro data: a weaker-form and a stronger-form. The former exists if the price level and the marginal cost share a common long-run trend; i.e., cointegrated. The latter exists if the market price and the marginal cost are equal in the long run. There is more evidence for a weak-form competition than for strong-form competition. Macroeconomic interpretations of the deviations depend on whether the ratio of the price to marginal costs is equal to, greater, or lower than 1. The ratios vary significantly across countries and over time. A ratio of price to marginal cost >1 implies non-competitiveness. We interpret a ratio <1 to imply inefficiencies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Perfect Competition, price level, marginal cost, time series, cointgration, nonparametric
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D41 - Perfect Competition

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