Investigating the Influence of Firm Characteristics on the Ability to Exercise Market Power A Stochastic Frontier Analysis Approach with an Application to the Iron Ore Market

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. AbstractThis paper empirically analyzes the existence of market power in the global iron ore market during the period 1993-2012 using an innovative Stochastic Frontier Analysis approach introducedby Kumbhakar et al. (2012). In contrast to traditional econometric procedures, this approach allows for the estimation of firm-and time-specific Lerner indices and, therefore, the assessment of the influence of individual firm characteristics on the ability to generate markups. We find that markups on average amount to 20%. Moreover, location and experience are identified to be the most important determinants of the magnitude of firm-specific markups.

Assessing the market power of millers and wholesalers in the Bangladesh rice sector

“…The SF analysis essentially relies on the assumption that the divergence of a specific decision-making unit from the expected frontier (a production or cost frontier) can be split into two distinct parts: a classical stochastic noise part and an additional skewed residual that captures individual inefficiency (Germeshausen et al , 2014). Kumbhakar et al (2012) did not consider the traditional production/cost frontier; rather, they estimated a frontier of the proportion of revenue to the total cost.…”

“…As is the case for many empirical studies, data availability is a central issue (Germeshausen et al , 2014). For the estimation process applied in this paper, we rely on price data that are available for all inputs and outputs, and we draw on the SF method based on the efficiency estimation to measure mark-ups.…”

The Global Iron and Steel Industry: From a Bilateral Oligopoly to a Thwarted Monopsony

“…Throughout this period, the price reflected the main trade flows between developed countries and therefore resulted in a negotiated price between the Australians and the Japanese and between the Brazilians and the Europeans. Indeed, according to Warell and Lundmark () and Germeshausen, Panke and Wetzel (), Australian mining companies tended to mainly focus on the Asian market and, to a lesser extent, the European market, whereas Brazilian miners only exported to the European market. Moreover, under these contracts, mining companies are forbidden to offer a price lower than the negotiated tariff, as steel mill owners are prohibited from contracting at a price higher than the negotiated price (Li and Sun ).…”

“…In addition, financial actors might be sceptical about involvement in a project of this type. Germeshausen et al () shows that accumulated experience and the location of assets are the main factors determining the market power of mining companies (i.e., the potential power of an oligopoly) against steelmakers and potential new entrants. However, the market protections from which an oligopoly and all established miners appear to benefit is called into question when there is a demand shock.…”