Empirical Studies of Industries with Market Power
(1989)

Tools

by
James Levinsohn, James Levinsohn, James Levinsohn
- Journal of International Economics, 1993

"... It has long been believed that international competition forces domestic finns to behave more competitively. I term this the imports-as--market-discipline hypothesis. I construct a simple static oligopoly model and estimate the model using panel data from Turkish manufacturing firms. The data span t ..."

It has long been believed that international competition forces domestic finns to behave more competitively. I term this the imports-as--market-discipline hypothesis. I construct a simple static oligopoly model and estimate the model using panel data from Turkish manufacturing firms. The data span the course of a dramatic trade liberalization. Looking for changes in price-marginal cost markups as trade policy shifts, I test the imports-as-market discipline hypothesis. In all five industries to which the hypothesis is relevant, markups change in the direction predicted by the theory. These changes are statistically significant in all but one of the five industries.

Abstract: Using bank-level data and applying the Panzar and Rosse (1987) methodology, we estimate the degree of competition in 50 countries ’ banking systems. We then relate our competitiveness measure to countries ’ structural and regulatory indicators and find systems with greater foreign bank entry, and fewer entry and activity restrictions to be more competitive. We find no evidence that banking system concentration negatively relates to competitiveness. Our findings confirm that contestability determines effective competition, especially through allowing (foreign) bank entry and reducing activity restrictions. At the same time, our findings also suggest that competition policy in the financial sector can be more complicated than perhaps previously thought.

"... Recently there has been a significant decline in the degree to which firms “pass through” changes in costs to prices, a decline that is frequently characterized as a reduction in the “pricing power ” of firms. The decline appears to be associated with the decline in inflation in many countries. The ..."

Recently there has been a significant decline in the degree to which firms “pass through” changes in costs to prices, a decline that is frequently characterized as a reduction in the “pricing power ” of firms. The decline appears to be associated with the decline in inflation in many countries. The decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation. Some have argued that the decline in pricing power helped keep inflation low in the face of apparently strong demand pressures in the United States in the late 1990s. This paper puts forth the view that the decline in pass-through or pricing power is due to the low inflation environment that has recently been achieved in many countries. First, a microeconomic model of price setting is used to show that lower pass-through is caused by lower perceived persistence of cost changes. Evidence is then presented showing that inflation is positively correlated with persistence of inflation, suggesting that the low inflation itself has caused the low pass-through. An economy-wide model consistent with the micro model is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways, but can disappear quickly if monetary policy and expectations change.

"... The effectiveness of China's incremental industrial reform between 1980-89 is empirically investigated using a panel data set of 769 state enterprises from 36 2-digit industries. I derive and apply a method that measures marginal products of factors, changes in total factor productivity (TFP), ..."

The effectiveness of China&apos;s incremental industrial reform between 1980-89 is empirically investigated using a panel data set of 769 state enterprises from 36 2-digit industries. I derive and apply a method that measures marginal products of factors, changes in total factor productivity (TFP), and improvements in factor allocation between enterprises by comparing actual changes in output to actual changes in inputs. Under this approach, the production functions can differ arbitrarily across rms. Market power in product markets and deviations from efficient allocation of factors are also permitted. This study finds that there were marked improvements in marginal productivity of factors and in TFP between 1980-89, and that over 73 percent of output growth was attributable to TFP growth, and over 87 percent of TFP growth was attributable to improved incentives, intensified product market competition, and improvements in factor allocation.

"... We examine the bidding behavior of firms competing in the newly created spot market for electricity in Texas, where electricity generating firms submit hourly supply schedules to sell power. We characterize an equilibrium model of bidding into this market and use detailed firm-level data on bids and ..."

We examine the bidding behavior of firms competing in the newly created spot market for electricity in Texas, where electricity generating firms submit hourly supply schedules to sell power. We characterize an equilibrium model of bidding into this market and use detailed firm-level data on bids and marginal costs of production to compare actual bidding behavior to theoretical benchmarks derived from our model. We find that firms with large stakes in the market performed close to the theoretical benchmark of static profit-maximization. However, several smaller firms utilized excessively steep bid schedules that significantly deviated from this benchmark. Our results suggest that payoff scale has an important effect on firms ’ willingness and ability to participate in complex, strategic market environments. We find that the bidding behavior of the smaller firms contributed significantly to productive inefficiency in this new market, although the smaller firms moved closer to the theoretical bidding benchmarks over time.

"... (*) The views expressed in this paper are those of the authors and do not necessarily reflect the views of the ECB nor the National Central Bank to which they are affiliated. This paper is based on a set of studies, each related to a euro area country, conducted in the context of a Eurosystem resea ..."

(*) The views expressed in this paper are those of the authors and do not necessarily reflect the views of the ECB nor the National Central Bank to which they are affiliated. This paper is based on a set of studies, each related to a euro area country, conducted in the context of a Eurosystem research project (Inflation Persistence Network, hereafter IPN). The authors belong to the ECB and to the National Central Banks that have been involved in a research sub-group of the IPN devoted to the analysis of micro producer prices. The contribution of many other members of this research group and co-authors of country studies (Luis Álvarez, Pablo Burriel, David Cornille, Monica Dias, Silvia Fabiani, Angela Gatulli, Claire Loupias, Pedro Neves, Patrick Sevestre and Giovanni Veronese), without whom this study would not have been possible, is strongly acknowledged. The authors would also like to thank the national statistical institutes for providing the data, and the many members of the IPN and an anonymous referee for helpful comments.

"... Deregulating wholesale electricity markets has the potential to increase the long-run eciency of the industry but poses the risk that rms may exercise market power. This paper analyzes the pricing behavior of electricity generating rms in the restructured California market from its inception in A ..."

Deregulating wholesale electricity markets has the potential to increase the long-run eciency of the industry but poses the risk that rms may exercise market power. This paper analyzes the pricing behavior of electricity generating rms in the restructured California market from its inception in April 1998 until its collapse in late 2000. The wholesale market was organized by a uniform price multiunit auction that was repeated daily. Oligopoly theory provides several static and dynamic pricing models that may capture behavior in this market. I use detailed rm-level data to test for both the unilateral exercise of market power and tacit collusion.