The Effect of Privatization and Competitive Pressure on Firms' Price-Cost Margins: Micro Evidence from Emerging Economies

43 Pages Posted: 5 Feb 2003

See all articles by Jozef Konings

Jozef Konings

Catholic University of Leuven (KUL) - LICOS - Centrum voor Transitie-economie; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Patrick J. G. Van Cayseele

KU Leuven - Department of Economics

Frederic Warzynski

Aarhus University - Department of Economics and Business Economics

Date Written: January 2003

Abstract

This Paper uses representative firm level panel data of 1,701 Bulgarian and 2,047 Romanian manufacturing firms to estimate market power (i.e. price-cost margins) and to analyse how these are affected by privatization and increased competitive pressure. In contrast to earlier work that analyses the effect of ownership on firm performance, the estimation method we use deals with potential endogeneity problems that are associated with estimating firm performance, by making use of the properties of the primal and dual Solow residual. State-owned enterprises have lower price-cost margins than privatized and foreign owned firms, which suggests that state-owned enterprises price closer to marginal costs and are more concerned with maximizing social welfare (allocative efficiency). An alternative interpretation is that state-owned firms have higher costs than private firms. Foreign-owned firms have the highest price-cost margins. Also privatized domestic-owned firms have higher price-cost margins than state-owned enterprises. In addition, our results give support to the idea that opening to trade has a disciplining effect on firms' market power. We find that increased import penetration is associated with lower price cost margins in sectors where product market concentration is relatively high.

Keywords: Market power, privatization, firm performance, transition

JEL Classification: L10, L33, P30, P50

Suggested Citation

Konings, Jozef and Van Cayseele, Patrick G. J. and Warzynski, Frederic, The Effect of Privatization and Competitive Pressure on Firms' Price-Cost Margins: Micro Evidence from Emerging Economies (January 2003). Available at SSRN: https://ssrn.com/abstract=377360

Jozef Konings (Contact Author)

Catholic University of Leuven (KUL) - LICOS - Centrum voor Transitie-economie ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium
+32 16 326 589 (Phone)
+32 16 326 599 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Patrick G. J. Van Cayseele

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium
+32-16-326830 (Phone)
+32-16-326796 (Fax)

Frederic Warzynski

Aarhus University - Department of Economics and Business Economics ( email )

hermodsvej 22
DK-8230 Åbyhøj
Denmark
+45 89 48 61 95 (Phone)

HOME PAGE: http://www.hha.dk/~fwa/frederic.htm

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