Product Market Power Research Articles

Product market competition, unemployment and income disparities

Product Market Competition, Unemployment and Income Disparities. — We discuss how promoting competition in product markets affects unemployment and wage differentials. We examine a general equilibrium model with real wage rigidities in labor markets and market power in product markets. We illustrate how more intense competition reduces unemployment. A decrease of markups would induce an increase of real wages if real wages were flexible. This enables the employment of more low-skilled people above a real reservation wage. More intensive competition, however, widens wage and income differences between low-skilled and high-skilled workers. Differences of income distributions across countries could also be caused by differences in the intensity of product market competition.

Product Differentiation and Market Power in the California Gasoline Market

This paper applies a model of market power measurement under product differentiation to the case of the gasoline market in California, using data for the period 1983–1989. Our results show that there is a considerable degree of product differentiation among major brands. This allows firms to exercise local market power over their own specific products, but there are also signals of an important degree of global market power. However, none of the four pure market structures analyzed (price taking, monopolistic competition, Cournot oligopoly and collusion) seems able to explain by itself the behavior of the whole market.

Product markets and labour markets

The concern of this paper is whether monopoly power in the product market impacts badly on the performance of the labour market. There is strong evidence of the sharing of monopoly rents and of higher wages being associated with market power. It is not clear whether this is simply a union effect or whether it applies in the non-union sector. The balance of the evidence also suggests a negative relationship between product market power and productivity performance.

Environmental Amenities as Sources For Product Differentiation and Market Power

This paper evaluates the importance of site-specific environmental amenities as a source of product differentiating market power. Using estimates from hedonic price equations and residual demand models, the analysis recovers firm-specific estimates of price markup and estimates of the marginal willingness to pay for access to coastal beaches. The application used in the analysis involves rental price and occupancy data for several thousand beach properties along a portion of the North Carolina coastline during the 1987 to 1992 rental seasons.

Trade Unions and Firms' Product Market Power

A production function model with efficient bargaining between oligopolistic firms and unions is developed to distinguish between product market power and union power in capturing economic rents. The model is formalised using the generalized Nash bargaining solution, and is empirically tested on four Belgian manufacturing sectors. The conclusions are that product market power is significantly eroded by wage rents, but firms retain most of their power during negotiations. Also, the restrictions imposed on the data do not reject the hypothesis that wage erosion arises from efficient bargaining, in accordance with other empirical findings for Belgian manufacturing.

Insider power, market power, firm size and wages: Evidence from Dutch manufacturing industries

The objective of this study is to assess the impact of internal (sector-specific) and external (labour-market-related) factors, the number of insiders, product market power and firm size on wages in Dutch manufacturing industries. The weight of the internal factors approximates that found in earlier research for the UK, it is higher than that found for Scandinavian countries, yet lower than that found for the US. A high weight of the internal factors is generally deemed favourable as it stabilizes employment. Evidence for the emergence of insider effects, which may cause unemployment persistence, cannot be established. It is however observed that product market power increases the weight of internal factors. Finally, the weight of internal factors appears to be substantially higher for large firms than for small ones.

Capacity Constraints and Export Performance: Theory and Evidence from Belgian Manufacturing

A mark-up model for export and domestic pricing is developed using the dual approach of cost functions and taking explicitly into account the possibility of (short-run) capacity constraints. The model is applied on a panel of Belgian firms to infer product market power on both domestic and export markets, as well as to estimate the effect of export activity on the firm technology and pricing, through the effect of cost flexibility and capacity utilization. Copyright 1996 by Blackwell Publishing Ltd.

TRADE UNIONS AND FINANCIAL PERFORMANCE

This paper investigates the relationship between trade unions and financial performance using British establishment-level data. We estimate the average overall impact of manual union recognition in 1990 to be roughly half what it was in 1984. We report results suggesting that in 1990 unionized establishments have lower financial performance only where there are closed shop arrangements and the establishments have some product market power and that this effect is greater where managerial freedom to allocate tasks is limited by union work rules. This latter combination occurs in only about one in ten of the unionized workplaces in our sample.

Union-Firm Bargaining and the Influence of Product Market Power and Production Technology on Systematic Risk

The relationship between the CAPM firm beta and the firm's microeconomic decisions is studied by a model under uncertainty, which combines the feature of an ex ante “inputs substituable” production technology and the existence of a union which bargains over various economic dimensions of the firm. It is shown that the earlier findings of a relationship between the firm beta, the firm product market power, and the labor-capital ratio may be reinforced through the indirect channel of labor market bargaining, but the relationship becomes more complex, and heavily depends on the scope of the union-firm bargaining process. This yields the empirical prediction, confirmed for a panel of Belgian firms, that any proper estimation of the determinants of firm beta, must control for firms in the sample being unionized.

Cost of capital and market power: The effect of size dispersion & entry barriers on market equilibrium

A market power explanation for the observed empirical fact that large firms in a given industry pay less for their capital than small is developed. Larger firms in an industry are shown to pay less for their capital than small because they have more control over the market and the riskiness of their divided stream is correspondingly smaller. More firms in an industry with a given size dispersion raises the cost of capital to the incumbents, but proportionately more to smaller firms. However, the most significant result is that a greater dispersion of sizes will reduce the riskiness of the dividend stream of the larger firm and increase the riskiness of the smaller firm, causing an increase in the dispersion of capital costs. Hence product market power enhances capital cost efficiencies.

Correction to `Wages and Product Market Power'

Correction to `Wages and Product Market Power'

Dynamic Count Data Models of Technological Innovation

This paper examines the application of count data models to firm level panel data on technological innovations. The model we propose exhibits dynamic feedback and unobserved heterogeneity. We develop a fixed effects estimator that generalises the standard Poisson and negative binomial models allowing for dynamic feedback through both the firm's stock of knowledge and its product market power. By using the long pre-sample history of innovation information this "entry stock" estimator is shown to control for correlated fixed effects and is compared with an alternative nonlinear GMM estimator. We find evidence of history dependence in innovation activity although variables reflecting the company's economic environment are also found to play a major role.

Wages and Product Market Power

This paper analyses time-series on some 800 British manufacturing companies to address various questions concerning the role of insiders and market power in wage determination. The following are the most important results. First, product market power has a positive impact on wages; this impact is enhanced in large firms but is not influenced by union status. Second, while firm-specific factors influence wages, the size of these effects is not influenced by union status, firm size or product market power; however, product market power reduces the generally strong negative effect of unemployment on wages. Finally, there is no robust evidence of insider power at work in wage-setting irrespective of product market position.

Union-Firm Efficient Bargaining and Test of Oligopolistic Conduct

This paper applies a production function approach to the analysis of imperfection in product and factor markets and develops a test of Efficient Bargaining for wage and employment determination. Based on a translog function defined at the firm level, estimates for the Belgian chemical industry are consistent with the existence of product market power which is significantly eroded by union wage rents.

Externalities in Wage Formation and Structural Unemployment

A sectorial general equilibrium model in which externalities among sectors arise through wage envy is presented. Without externalities, equilibrium unemployment is only a function of the product market power of the firm and of demand uncertainty. With externalities, unemployment is higher. It is increasing with union power even though bargaining is efficient. Aggregate demand shock do not modify the magnitude of unemployment. However, when externalities are present, sectorial demand shocks modify the allocation of output across sectors; this reallocation may increase or decrease unemployment depending on the initial situation of the economy.

A SIMPLE IMPERFECTLY COMPETITIVE MODEL OF THE DISTRIBUTION OF INCOME

A simple imperfectly competitive model of income distribution is developed in which sellers have market power in both product and labor markets. Market power in product markets is the dominant factor affecting relative shares. A mark-up pricing model is put forward in which firms base price on an incorrect mark-up over average variable costs. Simulations suggest that actual mark-ups are likely to be quite close to profit-maximizing levels. However, small deviations from correct levels that imply small individual losses can have quite large macro effects on output, employment, and relative shares. Copyright 1992 by Scottish Economic Society.

Distributional Conflict, the Current Account, and Fiscal‐monetary Policies under Flexible Exchange Rates

The aim is to integrate the dynamics of asset accumulation for open economies with the conflict theory of wage and price formation. This synthesis allows us to assess the results obtained in the mainstream asset market models based on an atomistic view of the economy, analyse the influence of market power in product and labour markets on aggregate economic activity, and to investigate new sources of potential instability.

Wage Inflation, Unionization, and Monopoly Power

This paper uses panel data from 301 four-digit manufacturing industries over the years 1959 to 1980 to examine how market structure affects the wage response to aggregate demand disturbances. The authors use a new classical macroeconomic framework in which such shocks are identified with the unexpected component of money growth. They find that product market power does not affect the response of wages to such shocks, but that unionization does. To be specific, greater unionization leads to a faster wage response. They also find that wages rise equiproportionately with expected money growth, i.e., expected money is neutral. Copyright 1990 by Blackwell Publishing Ltd.

Do high profits imply low wages?

It is argued in this paper that, contrary to what may be commonly believed, high wages are not inconsistent with monopsony power (neoclassical exploitation). In fact, it is argued, when a monopsonistic firm has economically profitable product-market monopoly power, which would seem to be the typical real world case, the firm's wages are expected to be high. Clearly, the situation described by the combination of profitable monopoly-monopsony conditions explains a high wage insofar as these conditions represent a profit opportunity which provides an incentive to pay a high wage and without which the high wages would not be offered or paid.

Estimating the residual demand curve facing a single firm

This paper presents an econometric technique for estimating the single firm residual demand curve that does not require the estimation of demand cross-elasticities. The technique is particularly suited for the estimation of firm market power in product differentiated industries, where cross-elasticities are notoriously difficult to measure. One estimated parameter is directly related to a firm's markup of price over marginal cost when product differentiation is extensive, when an industry consists of a dominant firm and a price-taking fringe, when a Consistent Conjectures Equilibrium is the correct oligopoly solution concept, when firms are Stackelberg leaders relative to their environment, or when firms are perfect competitors. The estimates can indicate power over price in other circumstances. An instrumental variables technique is employed, using firm-individuated factor prices to identify firm-specific residual demand. Yet even when instruments are unavailable, the technique produces elasticity estimates biased in the conservative direction of disproving market power. This methodology is applied to estimate the market power of three firms in an industry characterized by product differentiation: brewing. Over our 1962–82 sample period, Pabst and Coors had similar national market shares and each had high shares in several states. Yet Pabst was virtually a price-taker while Coors possessed substantial market power. Anheuser-Busch had market power in the early part of the sample, but little after 1975 when Miller Brewing changed the competitive nature of the industry.