Identifying Competition Neutrality of SOEs in China

Abstract

This paper attempts to identify competition neutrality of state owned enterprises (SOEs) in three consumer electronics industries in China. First, I draw a benefit-price indifference curve, at the mode of consumer surplus for each year, and a benefit-price supply curve by the manufacturers and ownership types, based on the demand estimates of for the color TV (CTV), Mobile phone and Air conditioner industries in the 2000s. These exercises indicate heterogeneous situations of the market neutrality of SOEs in the Chinese consumer electronics industries: The air conditioner market shows a clear positive relationship between benefit and price for all the ownership types. At the same time, no clear correlation between ownership and strategies focusing on price or benefit is observed. On the other hand, SOEs and privately-owned enterprises (POEs) in CTV and mobile phone markets concentrate their products based on lower prices and lower benefit area, namely, they are taking cost advantage strategies. Ownership type and strategies appears to have a correlation. Furthermore, price becomes independent to the level of benefit for local firms. These tendencies are clearly observed in the price-benefit supply curve of the two markets. A simple model of differentiated competition with one agent committing predatory pricing in expropriating soft financial constraint shows that the price set by the rivals of a soft constrained firm is independent to the benefit.