Market Power Of Firms Research Articles

Keeping the Land Wet: Competition and Incumbency in the Liquid Fuel Value Chain in South Africa

Barriers to entry, by reinforcing the market power of incumbent firms in liquid fuel distribution, have meant that the pace of transformation throughout the fuel value chain in South Africa has been slow. The ability of new firms to enter the sector, develop capabilities, and become effective competitors to the major oil companies is important for achieving transformation and introducing dynamic rivalry in the liquid fuels sector. This paper draws on a recent CCRED study based on interviews with market participants and publicly available sources to assess the nature and extent of barriers to entry and expansion of firms in the wholesale of liquid fuels. The analysis focuses on access to supply, access to customers, access to key infrastructure, and policy and regulatory challenges rather than the known shortage of skills and finance in the sector. It is clear that these challenges at the wholesale level form part of a broader set of concerns in the value chain as a whole, relating to access to infrastructure and low levels of competition between the major oil companies themselves. The paper concludes by suggesting a set of short and long-term remedies for increasing access and competition in transportation and storage, and wholesaling infrastructure.

Examining the Relationship between Gold Prices and Gold Mine Extraction Costs: Evidence from Country and Company Data

This paper analyses the causal relationship between gold production costs and gold prices using a hand-collected set of country and company data on gold mining. We find strong econometric evidence for causality running from gold prices to gold production costs. The results are supported theoretically by the small amount of annual gold production relative to the total stock and the real options embedded in gold mines. The low flow-stock ratio of gold implies low market power of gold mining firms and thus an inability to significantly influence gold prices. The real options enable gold mining firms to adjust production conditional on the gold price. Production thus follows gold prices.

Collaborative Patterns and Power Imbalance in Strategic Alliance Networks

Firms are connected with other firms through a variety of economic relationships that can be viewed as a form of social network. Resource-dependency theory (RDT) suggests that formal joint ventures among firms occur as a result of resource procurement, perceived strategic interdependence, expansion opportunities, legitimacy, and risk mitigation. A key unexplored element of RDT is the collaborative structure among firms with technical capabilities subordinate to their alliance partners and whether such structures are able to leverage sufficient market power to influence the industry sector within which they exist. Using the network characteristics of alliance partners in a technology- and capital-intensive industry sector, this work empirically examines the aggregate market power of so-called generalist firms. Collaborative patterns in the resources and mining sector and their impact on firm performance and resource quality are investigated using social network analysis. It is found that firms engaged in strategic alliances outperform firms operating independently; however, beyond a certain number of alliance partners, their performance declines. It was also found that, in aggregate, generalist nontechnical alliance partners can exercise significant market power in dense alliance networks, despite possessing almost no technical industry experience.

Product market power, industry structure, and corporate earnings management

This is the first study to establish a link between product market power of firms and the degree of earnings management. We hypothesize and document a significant and robust association between (a) a firm’s product market pricing power and its degree of earnings management, and (b) industry competitiveness and the degree of earnings management in the industry. Our study reveals that firms with inferior product market pricing power engage in greater discretionary earnings accruals, adding a new dimension to our understanding of the transparency and informativeness of firms’ financial statements. These findings are mirrored at the industry level where we document that more competitive industries are associated with greater earnings manipulation. The empirical evidence has direct implication on the informativeness and earnings quality of firms based on their product market power and competitiveness.

Firm Market Power and the Earnings Distribution

Using the Longitudinal Employer Household Dynamics (LEHD) data from the United States Census Bureau, I compute firm-level measures of labor market (monopsony) power. To generate these measures, I extend the dynamic model proposed by Manning (2003) and estimate the labor supply elasticity facing each private non-farm firm in the US. While a link between monopsony power and earnings has traditionally been assumed, I provide the first direct evidence of the positive relationship between a firm\'s labor supply elasticity and the earnings of its workers. I also contrast the semistructural method with the more traditional use of concentration ratios to measure a firm\'s labor market power. In addition, I provide several alternative measures of labor market power which account for potential threats to identification such as endogenous mobility. Finally, I construct a counterfactual earnings distribution which allows the effects of firm market power to vary across the earnings distribution. I estimate the average firm\'s labor supply elasticity to be 1.08, however my findings suggest there to be significant variability in the distribution of firm market power across US firms, and that dynamic monopsony models are superior to the use of concentration ratios in evaluating a firm\'s labor market power. I find that a one-unit increase in the labor supply elasticity to the firm is associated with wage gains of between 5 and 18 percent. While nontrivial, these estimates imply that firms do not fully exercise their labor market power over their workers. Furthermore, I find that the negative earnings impact of a firm\'s market power is strongest in the lower half of the earnings distribution, and that a one standard deviation increase in firms\' labor supply elasticities reduces the variance of the earnings distribution by 9 percent.

Productivity and Firm Selection: Quantifying the 'New' Gains from Trade

We discuss how standard computable equilibrium models of trade policy can be enriched with selection effects. This is achieved by estimating and simulating a partial equilibrium model that accounts for a number of real world effects of trade liberalization: richer availability of product varieties; tougher competition and weaker market power of firms; better exploitation of economies of scale; and, of course, efficiency gains via firms selection. The model is estimated on EU data and then simulated in counter-factual scenarios. Gains from trade are much larger in the presence of selection effects with substantial variability across countries and sectors.

Productivity and Firm Selection: Quantifying the ‘New’ Gains from Trade

We discuss how standard computable equilibrium models of trade policy can be enriched with selection effects. This is achieved by estimating and simulating a partial equilibrium model that accounts for a number of real world effects of trade liberalisation: richer availability of product varieties; tougher competition and weaker market power of firms; better exploitation of economies of scale; and, of course, efficiency gains via firms selection. The model is estimated on EU data and then simulated in counterfactual scenarios. Gains from trade are much larger in the presence of selection effects with substantial variability across countries and sectors.

Analysis of competition and market power in the wholesale electricity market in India

The electricity reforms were initiated in India with the objective of promoting competition in the electricity market. In order to promote competition, the Electricity Act 2003 was enacted and various policy initiatives were taken by the Government of India. Central Electricity Regulatory Commission (CERC) also facilitated competition through the regulatory framework of availability based tariff, Indian Electricity Grid Code, open access in inter-state transmission, inter-state trading and power exchanges. Despite these initiatives, electricity prices increased in the Wholesale Electricity Market in India (WEMI). This paper analyses the market structure and competitiveness in the WEMI. There are, of course, various potential reasons for the rise in the electricity price. This paper seeks to investigate, if market power was one of the reasons for increase in market prices. Concentration ratio, Herfindahl–Hirschman index, Supply Margin Assessment, and Residual Supply Index have been used to measure market power. This paper also uses the price–cost mark-up to examine, if exercise of market power led to higher margins. The analysis suggests that market power of firms may be part of the reason for the increase in electricity prices in WEMI. The study suggests various measures to increase competition in the WEMI.

Effective Market Shares and Antitrust

This article extends the single-market measure of market power to a multimarket setting in order to develop the concept of effective market share—what the market share of the hypothetical, single-market firm would have to be to exercise the same degree of market power as the actual, multimarket-dominant firm. This approach yields four main findings. First, traditional market power measures tend to overstate (understate) market power in the case of net complements (substitutes). Second, cost complementarities compound the effects of demand complementarities in tempering the dominant firm's market power. Third, the errors in measuring market power are asymmetric: policy makers are more likely to conclude that market power is present when it is absent than to conclude that market power is absent when it is present. Fourth, effective market shares facilitate more reliable inferences about market power and hence fewer errors in adjudicating merger and deregulation cases.

Lohnungleichheit, Erwerbsbeteiligung und Beschäftigung

This contribution focuses on the relation between wage inequality, participation behavior and employment and the analysis in the project “Flexibility of the wage distribution, inequality and employment”. In this project we investigate whether the popular idea of an encrusted German labor market with institutional regulations, minimum wages, high reservation wages, union power or insider behavior is consistent with the actual conditions.At first we critically assess the hypothesis that wage compression in Germany leads to employment losses. It can be shown theoretically that higher wage dispersion lower labor market participation as a negative side-effect. Empirical analyses support this result. A higher regional wage level as well as low unemployment—as an indicator for the stability of jobs—come along with high participation. A rise in wage dispersion in the lower part of the wage distribution is connected with decreasing employment participation, in the upper part with rising employment participation. As a further result it is shown that interdependencies between regions strongly matter.Additionally we highlight stylized facts about the development of wage inequality. We compare the US and Germany—countries with high and low wage flexibility respectively—based on harmonized micro data. We analyze the hypothesis that rigidities due to institutional influences imply a deformation of the wage distribution in the left tail. Such a characteristic wage compression would have to appear particularly for groups of low wage workers in countries like Germany. The comparison with the US labor market suggests the assumption that the deformation of the German wage structure with negative impacts on employment is a distorted picture.A further topic addresses the consequences of setting bounds to the extending inequality in the lower part of the wage distribution by introducing a wage floor. We focus on the effects of a minimum wage on wage inequality and employment. This minimum wage was introduced in 1997 in the German construction sector related to the German Workers Posting Law. We find positive wage effects of the minimum wage regulation in Eastern as well as in Western Germany, albeit the wage reaction in Eastern Germany was considerably larger. When it comes to employment effects, negative effects arise for Eastern Germany and positive for West Germany, although the latter are not always statistically significant. This result shows that a binding minimum wage does not necessarily imply negative employment effects.Finally, this contribution deals with a specific aspect of the wage inequality, the gender pay gap. The focus here is on the influence of the regional context. Having controlled for differences in individual characteristics, education and work places between men and women we show that the gender-specific wage differential is considerably higher in rural than in metropolitan areas. This differential has decreased notably in the last three decades in both regional types. The pay gap between young women and men in rural areas, in an environment with low firm density, is almost constantly ten percentage points higher during the whole observational period than in metropolitan settings. This result is consistent with a theoretical model that additionally takes into account market power of firms.

Firm Market Power and the Earnings Distribution

Using the Longitudinal Employer Household Dynamics (LEHD) data from the United States Census Bureau, I compute firm-level measures of labor market (monopsony) power. To generate these measures, I extend the dynamic model proposed by Manning (2003) and estimate the labor supply elasticity facing each private non-farm firm in the US. While a link between monopsony power and earnings has traditionally been assumed, I provide the first direct evidence of the positive relationship between a firm's labor supply elasticity and the earnings of its workers. I also contrast the semi-structural method with the more traditional use of concentration ratios to measure a firm's labor market power. In addition, I provide several alternative measures of labor market power which account for potential threats to identification such as endogenous mobility. Finally, I construct a counter-factual earnings distribution which allows the effects of firm market power to vary across the earnings distribution. I estimate the average firm's labor supply elasticity to be 1.08, however my findings suggest there to be significant variability in the distribution of firm market power across US firms, and that dynamic monopsony models are superior to the use of concentration ratios in evaluating a firm's labor market power. I find that a one-unit increase in the labor supply elasticity to the firm is associated with wage gains of between 5 and 18 percent. While nontrivial, these estimates imply that firms do not fully exercise their labor market power over their workers. Furthermore, I find that the negative earnings impact of a firm's market power is strongest in the lower half of the earnings distribution, and that a one standard deviation increase in firms' labor supply elasticities reduces the variance of the earnings distribution by 9 percent.

Trade Credit, Relationship-Specific Investment, and Product-Market Power

The extant literature on trade credit emphasizes its financing role wherein financially sound firms provide trade credit to ease the credit constraints of weaker trading partners. We offer an alternative, though not mutually exclusive, perspective in which trade credit serves as a commitment device. We develop a simple model to argue that an upstream firm commits to making the appropriate level of relationship-specific investment (RSI) by offering trade credit to the downstream firm. Our model predicts that trade credit will increase in (i) the level of the upstream firm's RSI, (ii) the relative bargaining power of downstream firms, (iii) the economic importance of the vertical relationship, and (iv) the cost and difficulty of verifying RSI. Using firm R&D, innovation activity, and production of differentiated goods and services to proxy for RSI, we find strong support for these predictions in a large panel of publicly listed firms. We show that trade credit is increasing in RSI proxies and decreasing in the market power of upstream firms. Further, these relationships are stronger when information frictions are greater: for example, when the upstream firm has had a shorter relationship with its downstream customer, the upstream firm is further away, is younger, or not NYSE-listed.

Signaling quality through prices in an oligopoly

Firms signal quality through prices even if the market structure is very competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality and each firm's product quality is private information (unknown to consumers and to other firms), there exist symmetric fully revealing perfect Bayesian equilibria where low quality firms randomize over an interval of prices and high quality firms charge high prices. Signaling requires that the market power and rent of low quality firms be large enough and often this requires that high quality firms exercise sufficient market power. There is a unique symmetric fully revealing equilibrium satisfying the D1 criterion; in this equilibrium too, both low and high quality firms may exhibit considerable market power. Market power of high quality firms may persist even as the number of firms becomes arbitrarily large. Every D1 equilibrium involves some revelation of information.

Measurement of the market power of firms: the Japanese case in the 1990s

This article presents a new simple econometric framework for the estimation of individual firms' markup over their marginal cost, taking account of firm heterogeneity, demand-driven cyclical price changes, and the limited availability of firm-level information. The framework is applied to study markup of Japanese firms in manufacturing and wholesale/retail trade for 1994--2002. The results indicate that, on average, the Japanese markets become more competitive in the 1990s than before even in non-manufacturing industries. We also find sizable heterogeneity and non-negligible pro-cyclicality in the markup of the Japanese firms. Copyright 2009 The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

Globalisation, Concentration and Footloose Firms: In Search of the Main Cause of the Declining Labour Share

Over the last two decades the share of national income which accrues to labour has followed a marked downward trend across a host of industrialised countries. This paper attempts to assess the importance of several potential causes of this phenomenon. We investigate compositional effects, the effect of declining trade costs, changes in the market structure (concentration) and the effect of low-wage competition between countries. Overall, the findings suggest that lower trade costs and factors related to economic integration such as industry concentration, the market power of firms and increased international low-wage competition indeed affect the labour share. However, their effect has been quite limited when compared to changes in the sectoral composition, the effects of technological change, cyclical factors and changes in the prices of intermediary goods.

Technological complementarities, demand, and market power

Recent technological changes in many industries have generated numerous complementary technologies. A key implication of complementary technologies is that the demand for related services has tended to change both qualitatively and quantitatively. While the economics literature has examined various aspects, the effects of technological complementarity have not been fully flushed out. Using a simple model, this paper examines the implications of technological complementarity. How have firms' pricing abilities changed with complementary technologies? What implications do complementary technologies have for regulation? Results show that technological complementarity has the potential to increase the market power of firms, possibly increasing prices to unprecedented levels. This holds whether demand elasticity is constant or variable. Policy implications are discussed.

Logical Problems and the Teaching of Economics - A Plea for an Explanation

The basic academic education in economic thinking is dominated by very simplified models of firms and individuals in the market. The theory of firm, which is the fundamental model of neoclassical microeconomics, therefore has great influence on the way people think about economic processes. The following paper elaborates logical inconsistencies of the standard model of neoclassical microeconomics first raised by George Stigler and extensively discussed by Steve Keen, which arise if all actors are considered to be mere price-takers. Taking this inconsistencies seriously leads to the conclusion, that - interpreting the marginal market power of the individual firms correctly - a competitive environment yields quantities, prices and profits, that differ fundamentally from those predicted by standard neoclassical microeconomic models. Therefore we want to encourage the teachers of economics to enter the debate around these inconsistencies.

FIRM SPECIFIC DETERMINANTS OF MARKUP ‐ THE CASE OF SLOVENIAN MANUFACTURING FIRMS

Investigations of firms’ pricing decisions and performances have been twofold. While within the industrial organisation framework stress is placed on industry‐specific factors and the market power of firms within industries, various organisational theories emphasise the role of ‘soft’ factors in the determination of firms’ performance. The main thesis of our paper is that the size of a firm's markup can mostly be explained by the firm's productivity, capital and labour costs, as well as the firm's market power and organisational structure characteristics, when the external environment and industry membership is controlled for. Our objective is thus to explain firm‐level markups by a set of firm‐specific factors. The empirical analysis of markup determinants is based on a sample of Slovenian manufacturing firms (NACE 15–37) in the 1994–2003 period, applying panel data regression GLS model and ANOVA analyses. We find that, besides market share and cost factors, organisational structure change occurring after some threshold significantly increases markups.

The moderating influence of firm market power on the transaction cost economics model: An empirical test in a forward channel integration context

AbstractTransaction cost economics (TCE) has guided a variety of research on governance in the strategic management literature. An important question arises, however, as to whether the TCE framework is equally appropriate for all types of firms in all business settings. In this paper, we argue that TCE is not and suggest that firms with high market power may be able to lower transaction costs under high asset specificity and uncertainty in nonintegrated distribution channels, avoiding the need to utilize highly integrated channels as a result. We test our hypotheses with data collected from 40 manufacturers of electronic and telecommunications products in 109 product‐markets in the United States. The results support our hypothesis that transaction cost factors are better at explaining forward channel integration for firms with low market power than for firms with high market power. Our results indicate that the basic TCE framework must be supplemented by the market power construct to adequately explain forward channel integration decisions. Copyright © 2007 John Wiley & Sons, Ltd.

The Changing Structure of International Trade Linked to Global Production Systems: What are the Policy Implications?

The paper discusses the extent of the structural change and its causes and implications for policy and theory. According to the paper, structural change is due to the rise of trade in intermediate goods. It emphasizes theories to be more focused on the competitive struggle of absolute advantage and externalization. This entails industrial, competition, and labour market policies at national levels aimed at producing profit and wage growth, which is needed for long-term economic growth through the building of skills, knowledge-based assets, infrastructure, and demand. Referring to past success cases, the paper argues that for industrial upgrading, countries cannot solely rely on inward foreign direct investment and a balance is needed between firm market power and profits and competitive pressure, which promotes knowledge-asset creation. Policy implications include promoting R&D, skill development in production and management, and very specific competition policy. This paper was written as an insight into the work of the World Commission on the Social Dimension of Globalization 2004 that aims to provide a fairer globalization for all.