Discussion of A Measure of Competition Based on 10‐K Filings

Li, Lundholm, Minnis (henceforth LLM) examine one of the most central and important areas of economics: competition. Competition is what is viewed as promoting efficiency and what keeps the price of a product closer to its marginal cost. The topic dates back to Adam Smith [1776] in the Wealth of Nations. George Stigler won the Nobel prize in 1982 for his “seminal studies of industrial structures, functioning of markets and causes and effects of public regulation.” Competition has its own Wikipedia entry. According to Wikipedia “Competition in biology, ecology, and sociology, is a contest between organisms, animals, individuals, groups, etc., for territory, a niche, or a location of resources, for resources and goods.”1 Competition has an important policy focus as society wishes to ensure that the contest or game is “fair.” One of the chief parts of competition enforcement in business is to ensure companies do not take actions that restrain competition and result in harm to consumers (or firms) through prices that are systematically higher (or lower) than the cost of production. Competition has many attributes and extensive research and policy interest. An examination of competition typically begins by determining the market or location over which competitors are competing. Second, the identity of current or potential competitors competing in the product space is determined. Third, regulators or analysts would determine the type of competition and whether it is unidimensional: competition through prices (Bertrand competition), quantities (Cournot competition), or whether