THE IMPACT OF REFORMS AND PRIVATIZATION ON FIRMS’ CONDUCT IN THE PRESENCE OF INTERCONNECTED CONGLOMERATES AND WEAK AND INEFFICIENT REGULATORY INSTITUTIONS

Abstract

ABSTRACTCritics of broad reforms, including privatization, argue that these policies may lead to the creation of rent‐seeking interconnected large business groups in the absence of a strong regulatory framework and well‐functioning courts. The empirical evidence in a developing country context in particular is however still scarce. Based on a case study of the Pakistani cement industry, this paper fills this gap. Our study shows that due to interconnected conglomerates’ tactics, such as exclusionary practices, the acquisition of smaller competitor firms and the addition of significant capacities, the industry has witnessed a stable degree of seller concentration after broader reforms including privatization. Consequently, colluding conglomerate firms have been able to maintain control over supply and prices for two decades in the post‐reform period, despite allegations of tacit collusion leading to the imposition of fines and the issuing of warnings by the regulator, which is, however, weak and inefficient.