Impact of Vertical Integration on Market Power in Indian Manufacturing Sector During the Post-Reform Period

Abstract

In the context of declining degrees of vertical integration in major industries of Indian manufacturing sector during the post-reform period, the present paper is an attempt to examine how such “vertical disintegration” has affected firms’ market power and its implications for competition policy. Using panel dataset of 49 majors industries of Indian manufacturing sector for the period 2003–04 to 2010–11 and applying the system generalized method of moments approach to estimate of dynamic panel data models, the paper finds that vertical integration does not cause any significant impact on average market power of firms in an industry. Instead, it is influenced by market size, and selling and technology-related efforts. While selling intensity has a positive impact on market power, the impact of market size and technology intensity is found to be negative. Notably, like vertical integration, market concentration, import to export ratio, and capital intensity also do not have any significant impact on market power. The findings of this paper, therefore, have important implications for competition law and policy in general and policies and regulation relating to technology development and international trade in particular.