Measuring the Magnitude of Significant Market Power in the Manufacturing and Services Industries: A Cross Country Approach

Abstract

This paper provides estimates of price-marginal cost ratios for manufacturing and services sectors in the Eurozone, the US and Japan over the period . The estimates are obtained applying τhe methodology developed by Hall (1988) and extended by Roeger (1995) indexes, and the degree of sectoral regulation. However, these indicators do not always reflect the real degree of competition in a sector (Trėsor-Economics, 2008). 3An alternative approach is to use national accounts data to infer conclusions about the difference between the selling price (P) and the marginal cost (MC), since the less competition there is in a sector, the more the price can diverge from the marginal production cost. In other words, we can use the ratio between the sale price and the marginal production cost (mark up ratio) in order to gauge the intensity of competition in a sector. As a consequence, mark-up estimates of different sectors and different countries allowing for comparisons of the degree of competition, they should help in identifying which sectors and/or countries would benefit most from changes in legislation or regulation that affect competition.The approach adopted here is to estimate econometrically the level of market power by following the methodology developed by Hall (1988) and extended by Roeger (1995). This methodology is based on the hypothesis that in a situation of perfect competition the selling price is equal to marginal cost. The equality of marginal cost and price is essential for the efficiency of the economy since, first, competitive markets can achieve higher productivity levels, and second, competition provides consumers with products of higher quality, increased variety and lower prices (Rezitis and Kalantzi, 2013). However, this condition does not apply in a less competitive environment (i.e oligopoly markets, monopolies), since the price deviates from marginal cost. Therefore, the ratio between the selling price and marginal cost assesses the competitiveness of the market. However, while selling price is directly observable, the marginal production cost is not. This drawback was overcome by Hall (1988) and Roeger (1995) who both showed that under perfect competition, the nominal growth rate of the Solow residual is independent of the nominal capital productivity growth rate. It then follows that the coefficient linking the nominal 4 growth rate of the Solow residual to the nominal capital productivity growth is the Lerner Index defined as the ratio of the price minus marginal cost to priceDespite the voluminous amount of work on the topic, none of these studies -to the best of our knowledge-has examined this relationship for the Eurozone countries. Furthermore, unlike previous studies, we use an array of econometric techniques (OLS, 2SLS and bootstrap methods) to test the robustness of the results. The scope of this paper is that its empirical findings might be used as a benchmark to otherEuropean countries in order to asses the degree of competition in certain manufacturing and services sectors...

Pricing Decisions and Competitive Conduct Across Manufacturing Sectors: Evidence from 19 European Union Manufacturing Industries

“…In addition, export-oriented firms tend to be more productive than their domestic counterparts and they enjoy higher productivity gains when they are exporting towards high income economies. This argument validates the study of Nicoletti and Scrapetta (2005) who mentioned that firms operating in highly competitive markets tend to increase their investment and productivity levels to keep up with their 4 However, Polemis and Fotis (2016) found no evidence of imperfect competition in the majority of manufacturing and service sectors of the Eurozone, the US and Japan. The main factor for this outcome lies on the openness of the sectors to international markets and deregulation resulting in competitive pricing strategies.…”

“…Imperfect competition is a major concern in welfare analysis as it reduces consumer surplus and may erode entry barriers to new firms restricting their access to markets and thus, reducing production overall. Given that the manufacturing industry is very important to consumers as it is used to satisfy their primary needs, many studies have been carried out focusing on the market conditions across the OECD economies (Badinger, 2007;Christopoulou and Vermeulen, 2012;Afonso and Costa, 2013;Polemis and Fotis, 2016). The main argument is that rising market power in different sectors across the industry can be reflected by the pricecost margin as any gap between the selling price and the cost of production enhance this particular outcome.…”

Pricing decisions, competition and liquidity constraints

“…This outcome is also supported byPolemis and Fotis (2016) arguing that the wholesale and retail sector in the Eurozone appears to be highly competitive.16 However, it is worth noting that the aforementioned study includes every wholesale and retail industry in the EEA economy, while the present study includes only the food, beverages and tobacco segment.…”

“…Several empirical studies across the literature investigate the market conditions in OECD economies focusing on their pricing decisions and their market performance overall (Christopoulou and Vermeulen, 2012;Afonso and Costa, 2013;Polemis and Fotis, 2016).…”

The Effects of Competition, Liquidity and Exports on Markups: Evidence from the UK Food and Beverages Sector

“…The empirical literature of investigating the presence and extent of market power in various industries has been focused on the OECD countries over the recent years (Christopoulou and Vermeulen, 2012;Afonso and Costa, 2013;Polemis and Fotis, 2016). The UK is considered to be amongst the strongest economies in this group as the value of nominal GDP is the fifth largest across the globe.…”