Evolution and Efficiency of Concentration

Abstract

Part of the legacy of a command economy are highly concentrated market structures. The purpose of the study is to analyze the extent to which market structures of manufacturing industries in the Czech economy adjusted during the first three years of transition and to draw conclusions about the efficiency of this process at both industry and firm levels. Computations of oneand four-firm concentration ratios as well as Herfindahl indexes show that the levels of concentration in most industries changed radically between 1989 and 1992. The development of concentration was significantly different according to the industries. By the end of 1992 about half of the 440 product markets deconcentrated if compared to 1989. On the other hand, about one third of product markets became more concentrated, and the rest remained unchanged. Between 1989 and 1992, import competition strengthened in most markets. The incorporation of imports and exports into the domestic supply generally leads to a significant decrease in market concentration compared to the concentration computations for which domestic supply is not corrected for exports and imports. Industry concentration was positively correlated with labor productivity in both 1989 and 1992. This correlation was more significant in 1992 than in 1989. In 1992 a significant positive correlation existed between industry concentration and profit per employee, as well as between industry concentration and both profit-to-cost and average salary. These correlations were weaker or even negative in 1989. Higher productivity cannot be explained by the mere level of industry concentration, but it can be explained by the size of enterprises. The largest firms had significantly higher outputs per employee than the average for the industry. Nevertheless, the difference decreases as the level of concentration grows. No significant relation between concentration and profit-to-cost or profit-per-employee has been found on the firm level. The study discusses feasible and effective policy towards deconcentration of former centrally planned economy. Growth of import penetration, new entries in the manufacturing markets, and break-ups of enterprises are identified as the main sources of competition. In a small economy like the Czech Republic, these sources necessarily have different weights according to the particular market. Comparison of concentration levels with matched industries in Austria led to the conclusion that market structures in the Czech manufacturing industries are converging towards market economy norms, nevertheless some distortions still survive. This paper is co-sponsored by the Ford Foundation. The authors are grateful to Jan Svejnar, Aydin Hayri, Gerry McDermott and Mirek Singer for helpful comments.