Changing Institutions in the European Market: The Impact on Mark-Ups and Rents Allocation

Abstract

In this paper, we investigate whether the completion of the Single Market Programme has enhanced competition on the product markets across European countries, while taking into account the companion structural reforms undertaken by the member countries. In particular, since the Single Market Programme went hand in hand with major reforms in the labour market and in the institutional setting of important industries (i.e. network industries), we test for a break in both mark-ups and the division of rent between capital and labour. For this purpose we encompass efficient bargaining in the labour market in both our theoretical and empirical model. Using industry data for ten EU countries we find that, without controlling for changes in the rent sharing, mark-up estimates tend to increase in the 1990s. However, once we assume efficient bargaining in the labour market, mark-ups remain virtually unchanged or even decrease in some sectors or groups of countries; the result stems from the declining shares of rents accruing to workers owing to a decline in their bargaining power. Without controlling for this development, a rise in firms’ profitability due to rent reallocation could be wrongly interpreted as an increase in market power. At the industry level the evidence is particularly strong for high and medium-tech manufacturing, for construction and for those activities that went through deep institutional changes and privatization programmes.