Abstract
Abstract This note emphasizes some flaws of the Panzar–Rosse H statistic to address market power. First, I show that it is more related to the pass-through rate than to a market power measure, which implies reconsidering its interpretation and use. Second, I show that the inclusion of other strategic variables rather than prices or quantities may lead to contradictory predictions about market power. Therefore, competition authorities should refrain from using the H statistic to rule out significant market power because it is not a well-behaved measure of the degree of competition.
Highlights
The Panzar–Rosse model builds a competition indicator (H statistic) that provides a quantitative assessment of the competitive nature of a market
This note emphasizes some flaws of the Panzar–Rosse H statistic to address market power
We cannot rule out the monopoly case just because we find a positive H statistic, a significant market power is compatible with positive H statistics
Summary
The Panzar–Rosse model builds a competition indicator (H statistic) that provides a quantitative assessment of the competitive nature of a market. Shaffer and Spierdijk (2015) have computed the H statistic in different competitive environments (Stackelberg, Cournot, and Bertrand games) and have concluded that it is possible to find either positive and negative H statistics in theoretical models, which questions the idea of using the sign of the H statistic as a test to rule out significant market power. In this regard, to the best of my knowledge, the only work that has addressed a theoretical relationship between the H statistic and a measure of market power is Shaffer (1983), who proves that it is possible to derive the Lerner index as a function of the H statistic. We cannot rule out the monopoly case just because we find a positive H statistic, a significant market power is compatible with positive H statistics
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