Less Is More: Exploring the Impact of Competition on Profitability

Abstract: This thesis aims to explore how competition affects profitability. This is done by studying the relationship between competition and profitability across all industries in the U.S. between 2002-2021, focusing on public firms. This thesis is a quantitative study, where multiple linear regressions are used to identify the relationship. Moreover, fixed effects are applied to isolate the effect of competition on profitability. This thesis finds that increased competition in a market leads to lower profits on average for the companies operating within that market. The relationship is examined both by measuring competition as market concentration, using the Herfindahl-Hirschman Index, as well as measuring competition as market position and the consequence of being a market leader. It can be identified that the relationship between competition and profitability is non-linear, where being in a moderately competitive industry yields the highest contribution to profitability on average. This thesis contributes to both academia and practitioners. It adds to the literature on competition's impact on firm profitability. While previous research has mainly addressed specific industries, this study focuses on competition and its effect across industries. Moreover, it contributes to existing literature by using recent data, re-examining competition's potential impact. Further, this study provides a foundation for practitioners both on how to invest and how to regulate in order to ensure an efficient market from the point of view of consumer welfare.