The document discusses the Boone indicator methodology for measuring market competition. It summarizes that the Boone indicator examines the relationship between firm efficiency and performance, where a stronger relationship indicates greater market competition. It notes advantages are that it better captures competition on efficiency rather than price. Applications to banking and insurance sectors are discussed. New insights include plotting the nonlinear efficiency-performance relationship and measuring individual firm competitiveness through elasticity.

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The Boone indicator:
methodology and
application
Presentation at OECD workshop ”Methodologies to measure market
competition”, 23 February 2021
Michiel van Leuvensteijn
Opinions expressed may not necessarily reflect those of the ACM

2. 2
Introduction
• The Boone indicator
• Theoretical methodology
• Advantages and disadvantages of the
Boone indicator
• Applications
• New insights

3. 3
The Boone indicator
• Intuition: The relationship between efficiency
and performance strengthens when
competition increases, because in
competitive markets:
– Inefficient firms leave the market
– Inefficient firms are takenover by efficient firms
– Inefficient firms become more efficient.

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Methodology

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Relationship is continously rising and
can be concave or convex

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Advantage and disadvantage of Boone
indicator
• Advantage:
– Better measure than profit margin, firms can
compete on efficiency and not on price
– Framework works for both Bertrand and Cournot
competition
• Disadvantage:
- need of at least three firms
- loss making firms not incorporated
• Gap between theoretical framework and
empirical approach

7. 7
Applications
• Focus on relationship in natural logs of
marginal costs and profits
– Applications to bank and insurance sector
• Use of market share instead of profits, due
to large sample of firms with losses
• Provides an ‘average’ effect.

8. 8
New Insights
• Plot the nonlinear relationship
-The surface provides a measure of
competition in the market
-The elasticity provides a measure of
competitiveness of the individual firms
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Relative
profits
Relative Efficiency
Convex line Concave line

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Example: banking sector
Contribution by Ivan Huljak kindly acknowledged
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2005-2017
Country A Country B
Relative
efficiency
Relative
profits

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Competitiveness of banks:elasticity
(MRP)
Country A Country B
Contribution by Ivan Huljak kindly acknowledged

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Conclusion
• Framework of Boone (2008) can be used
better.
• Distinction should be made between
competition in the market and by individual
firms.
• Provides new insights on competition in
markets on possible barriers.