Abstract
This paper explores firm-level heterogeneity to identify the underlying drivers of market power trends in Romania and the implications for competition and economic growth. The results show that the (sales-weighted) average markup in Romania increased by around 15 percent between 2008 and 2017. A key driving force behind this aggregate trend was the ability of a small fraction of firms -- the top decile firms in the markup distribution -- to increase their markups. These firms do not seem to follow the typical superstar firms' profile: they are smaller, less efficient, and less likely to invest in intangible assets than other firms in the markup distribution and overrepresented in less knowledge-intensive service sectors (for example, the retail and trade sector). This suggests that the increase in markups in Romania might be associated with an environment that is less conducive to competition. A decomposition exercise shows that the increase in aggregate markups has been driven mostly by incumbents rather than new entrants and exiting firms, which could be interpreted as a sign of consolidation of market power among existing firms. The paper also finds that certain firm characteristics matter to explain differences in markup performance: size, age, research and development profile, export propensity, location, and especially ownership. Further, the paper shows that additional productivity dividends are associated with increased competition in Romania. Overall, these findings illustrate potential policy angles that need to be tackled to enhance market contestability and boost productivity growth, such as addressing regulations that restrict entry and rivalry in the retail trade sector, which concentrates a substantial proportion of high-markup firms, as well as promoting competitive neutrality across markets where public and private actors compete.
Highlights
AND MOTIVATIONA key stylized fact that has emerged in recent years is that corporate market power has increased at the global level
This paper presents new evidence regarding the evolution of corporate market power in Romania
HAS CORPORATE MARKET POWER INCREASED AT THE AGGREGATE LEVEL? HOW DO AGGREGATE TRENDS DIFFER ACROSS SECTORS? IS THERE A GROUP OF FIRMS DRIVING THE OVERALL TREND?
Summary
AND MOTIVATIONA key stylized fact that has emerged in recent years is that corporate market power has increased at the global level. Empirical literature produced in the past 10 years indicates that average levels of market power have been increasing across countries, in both developed and emerging economies. This trend has been measured through different metrics of market power, such as industry sales concentration ratios, firm-level profit rates, or firm-level price-cost margins. Leigh, and Tambunlertchai (2018) estimate firm-level markups for publicly traded firms in 74 countries between 1980 and 2016, including both advanced and emerging market economies They find evidence that increased markups are widespread but are more prominent among advanced economies that experienced a 39 percent increase in GDP-weighted average since 1980. The rise was strongly concentrated among advanced economies, but less so among emerging economies (7.7 percent versus 1.8 percent, respectively)
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