Chapter 5 Competition in transition. Competition in Transition b b Major features: 1. Liberalisation...
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Transcript of Chapter 5 Competition in transition. Competition in Transition b b Major features: 1. Liberalisation...
Chapter 5Chapter 5
Competition in Competition in transitiontransition
Competition in TransitionCompetition in Transition
Major features:• 1. Liberalisation of prices and trade • 2. Macroeconomic stabilisation policies • 3. Privatisation and new firms leading to the creation
of a large private sector• Increasing competition or competitive pressure
What was the impact of increased competitive pressure? • Firm sales, productivity, innovation...
Complementary of privatisation and competition
Centrally Planned Centrally Planned EconomyEconomy
Decisions made by central planners not market forces:• location, scale, integration of production defined• output quantities and types set by plan and sales guaranteed• prices and wages controlled
Objectives of the Central Plan firms different from those of the Market-oriented firms in that the Plan:
• Maximises output and employment, not profits• Does not minimise losses government always bails out the loss-
making firms (soft budget constraints)• Does not aim to improve goods’ quality. That required greater
coordination to deal with a greater number of brands and prices. market structure: very large firms and very few small
firms; no competition and build-in inefficiency
Transition ProcessTransition Process
Early 1990s: liberalisation of prices, trade, and labour market Large changes expected to happen:• reallocation of resources (via demand and supply):
– firms closing down and employees moving firms
• firm restructuring: – new plants, new or upgraded products, training of
employees, different organisation (different decision structure and working incentives)
Transition: natural experiment to test theory of competition and impact on firm performance.
Why is competition Why is competition important?important?
External factors impacting on firm performance:• Competition (product and input markets)
– More competition increases the bankruptcy risks increases managers’ efforts reduce costs, improve quality, launch new products.
• Ownership is associated with the risk of bankruptcy – But: lack of competition may reduce the bankruptcy risk so
need to have both• Soft budget constraints (various forms)
– reduce the impact of competition for state owned firms• Investment environment:
– macroeconomic environment, policy stability, taxation, infrastructure, legal system, law enforcement, access to loans.
Why is competition Why is competition necessary?necessary?
Competition (or market contestability) leads to:• 1) Efficiency:
– through harder budget constraints, increasing managers efforts, cost minimisation and profit maximisation increases welfare
• 2) Innovation: – incentive to surpass competitors by introducing new products
or improving product quality
• 3) Managers turnover: – improve decision making process and production techniques
• 4) Market selection: – entry/ expansion of small efficient and exit of inefficient firms
Some important Some important definitionsdefinitions
Perfect competition:• large number of small
firms • free entry and exit• price takers: buyers and
sellers decisions have no effect on market price
Monopolist: • one seller (or potential
seller of good Monoposonist:
• one buyer or potential buyer of good
Market contestability or potential competition• when few firms exist in
the market but• there is free entry (equal
access to technology and information) or exit,
• there is a threat to incumbent firms: new firms may enter and they may exit
importance of competition policy
Competition and Technical Competition and Technical EfficiencyEfficiency
Labour: L
Production: y = f(L)
A
LoL1
yo
y1
The Production Function
With competition-more production with same input-reduce production but reduce input
Competition and Allocative Competition and Allocative EfficiencyEfficiency
DemandMR
MC
y
P
ycym
pc
pm
Comparison between competition and monopoly
With competition-prices are lower = MC-quantities are higher
Shows importance to demonopolise or ensure market contestability.
X-Inefficiency or X-Inefficiency or managerial slackmanagerial slack
Monopoly power has perverse effects on the supply side:• monopolist produces at at a higher cost: pays little attention to
cost-cutting strategies• objectives other than profit maximisation and soft budget
constraints little monitoring of employees and production
MC1
MC0
y
P
ycym
pc
pm
The ratchet effectThe ratchet effect
Under central planning managers• were given a plan of production • but also bonuses rewarding them for
overfulfilling it • they would only slightly overfulfill the
planned production because bonuses would increase today and decrease tomorrow
wrong incentives Competition is to create a new
structure of incentives
Competition and market selection: entry and exit of SMEs
Market selection: • firm entry, survival and exit
Desirable selection and expansion: • efficient firms enter• inefficient firms exit• efficient firms expand productivity and
employment • exit or employment contraction is expected
in state-owned enterprises (SOEs)
Exit and exit barriersExit and exit barriers
Exit is a normal process of a market economy
Exit of inefficient firms and contraction of less efficient firms is to be expected with reforms
Exit barriers in transition• Legal/regulatory bankruptcy rules (bankruptcy
law) and its (low or slow) enforcement • Soft budget constraints that save inefficient
firms and potential exiting firms (they also become a barrier to entry)
Entry and entry barriers
New entry important• New goods and services, • Changes the balance between sectors• Innovation: new tech. and managerial techniques• Evidence suggests job creation is located in new
firms Entry barriers:
• natural barriers: economies of scale, patents, access to a technology structure of the particular market
• “strategic” barriers: strategic actions taken by incumbent firms to deter entry
Barriers to start-ups in transition countries
Uneven playing field between SOEs and start-ups• Licensing taxes and regulation; • Legal institutional norms (e.g. capricious actions by
public officials, corruption and lobbying groups); • Anti-Competitive practices by incumbents (SBCs,
collusion, favoured access to utilities or essential business);
• Macro-stabilisation (e.g. inflation); • Access to financing; • Access to infrastructure (e.g. distribution means,
utilities)
Measures of competitionMeasures of competition
Domestic competition• product market
– number of competitors– market concentration measures
– firm’s market share, HHI and CR
– ratio of the growth of output price to growth of input prices
– qualitative measures and managers’ perceptions
• inputs market– number of employers locally– market concentration measures using
employment
importsortsoutput
imports
nconsumptiodomestic
importsIP
exp
Foreign competition: imports may act as disciplinary tool (cheaper or better quality)
– import penetration ratios:
Concentration measuresConcentration measures
4
1
4i
imsCR : ratio ionconcentrat
100Y
ymsi i
i :share market firm
N
iimsHHI
1
2
: ionconcentratof Index Hirshman-Herfindahl
Measures of firm Measures of firm performanceperformance
Number of new products or upgraded products
Sales growth Profitability Price cost margins Technical efficiency: productivity
measured as total factor productivity Allocative efficiency: Solow residuals
Empirical evidenceEmpirical evidence
Evidence shows that competition (domestic and foreign) has positive impact on performance.
Studies:• Earle and Estrin (1995, 1998)-Russia; Konings (1997)-
Bulgaria, Romania and Hungary; Jones, Klinedinst and Rock (1998)-Bulgaria, Anderson, Lee and Murrell (1999)-Mongolia; EBRD Transition report (1999); Earle and Brown (2000)-Russia; Angelucci, Estrin, Konings and Zolkieski (2001)-Romania, Poland and Bulgaria, Konings
Studies used survey data, cross-sectional data, panel data
EBRD Transition report EBRD Transition report (1999)(1999)
Business Environment and Enterprise Performance Survey together with the world bank
Groups of countries:• Central Europe and Baltic countries• South-Eastern Europe• Central CIS• CIS periphery
Look at statistical association between variables
EBRD Transition report EBRD Transition report (1999)(1999)
Find that: • number of innovations increasing with number of
competitors • sales growth increasing in the number of competitors• when foreign competition is present sales growth is
higher suggesting that foreign competition is important
• exit barriers impact negatively on desirable contraction
• entry barriers impact negatively on desirable expansion
• not enough competition rules implemented
Konings (1997)Konings (1997)
300 firms (SOEs, privatised, new private firms) 300 firms (SOEs, privatised, new private firms) interviewed on ownership and competitioninterviewed on ownership and competition
3 measures of competition:3 measures of competition:• number of rivals (short run competition)number of rivals (short run competition)• expected change in price due to competitionexpected change in price due to competition• expected change in number of competitorsexpected change in number of competitors
competition has increased in all but in competition has increased in all but in Romania< Hungary and SloveniaRomania< Hungary and Slovenia
competition has positive effect on firm competition has positive effect on firm productivity in Hungary and Slovenia (LR) and productivity in Hungary and Slovenia (LR) and Romania (SR) Romania (SR)
Brown and Earle (2000)Brown and Earle (2000)
Panel of data from 1992-98 concerning 14,961 firms covering 75% of all industrial employment
Look at medium and large Russian firms (+100 employees) and their productivity.
Productivity measured as: total factor productivity Analyse association between several factors and
productivity Measure time path of the effects of competition:
slope dummies Measure intensity dimension of competition Firm individual effects: random effects
Brown and Earle (2000)Brown and Earle (2000)
Comprehensive and disaggregated information that allows to study the impact of• regional and national competition in the 1) product and 2)
labour markets (Russia is large country with important local markets for output and inputs)
• foreign competition through imports• participation in external markets or exports (international
markets screen firms: tough standards• transportation infrastructure: difficulties of transportion
hinder competition and generate market power and is barrier to entry
• macroeconomic environment: recession and boom
Brown and Earle (2000)Brown and Earle (2000)
What is in X, that is, the list of factors determining productivity?• National and regional product market concentration: HHI and
CR2• Mixtures of the national and regional with weights = % of
consumer goods in firm output and measure of transportation• Import penetration ratios• Local labour market concentration: HHI using employment• Transportation infrastructure quality• Ownership: state (fed., reg. and loc), mixed, private and foreign)• Initial conditions: military, profits, exports, size, ind. and reg.
growth • Real output growth • Industry dummies, Year dummies
Possible biasesPossible biases
1) Selection bias: • only look at efficiency of firms in the survey so
run a probit model for survival 2) Endogeneity:
• not a problem because transition changes structure exogenously
• but use instrumental variables (initial year of 92) 3) Other bias:
• privatised firms more efficiency or privatisation took place in more competitive markets: do as point 2.
Brown and Earle (2000)Brown and Earle (2000)
Results:• Survival equation
– domestic and foreign competition decrease prob. Survival– transport has negative effect– private and foreign firms more likely to exit– exports, size, profits, and growth have positive effect– no plants is positively and subsidiary is negatively
associated
• Productivity – domestic and foreign competition: positively associated – private ownership: private firm outperform state firms – initial profits: positive impact; military: negative, exports:
ambig. – ind. and reg. growth: positively
Angelucci, Estrin, Konings Angelucci, Estrin, Konings and Zolkiewski (2001)and Zolkiewski (2001)
Use a panel of firms in manufacturing for 3 countries: • Bulgaria (1997-98), Romania (1997-98) and Poland
(1994-1998) - good for comparing countries 1500 firms in Bulgaria, 2047 firms in
Romania, 17,570 firms in Poland Data from Amadeus and Polish statistical
office Studies the impact of ownership and
competition on firm productivity controlling for firm unobserved heterogeneity
Angelucci, Estrin, Konings Angelucci, Estrin, Konings and Zolkiewski (2001)and Zolkiewski (2001)
Back to the equations:• Inputs: capital and only one measure of labour • X includes:
– product market concentration: HHIat sector level – import penetration ratios– ownership: state, private and foreign– interaction terms between competition and ownership
– allows us to check on the complementarity between privatisation and competition.
– Industry dummies, Year dummies
• Use OLS, Fixed effects and random effects
Angelucci, Estrin, Konings Angelucci, Estrin, Konings and Zolkiewski (2001)and Zolkiewski (2001)
Results:• Ownership:
– Private domestic firms outperform state firms in Bulgaria, Romania and Poland. Private foreign firms outperform private domestic firms in Bulgaria and Poland but not in Romania.
• Domestic competition leads to – higher productivity in Poland (association reinforced for
foreign owned firms) and in Romania. In Bulgaria the effect of competitive pressure is found to be dependent on the ownership structure of the firm: a positive association is found for private firms only.
– Suggests complementarity of competition and privatisation
Angelucci, Estrin, Konings Angelucci, Estrin, Konings and Zolkiewski (2001)and Zolkiewski (2001)
Results (cont.)• Foreign competition:
– positively associated with firm performance in Poland (association found to be reinforced for foreign owned firms) but negatively associated with firm performance in Romania and in Bulgaria (though not significant for this country).
Zolkiewski (2001)Zolkiewski (2001)
Uses the data from Polish statistical office on all Polish firms
Estimates the production frontier X includes:
• ownership• market concentration proxying domestic
competition• Import penetration ratios as a proxy for
foreign competition
Zolkiewski (2001)Zolkiewski (2001)
Results• Labour = most import factor of production Polish
manufacturing reveals decreasing returns to scale. • Private firms, especially foreign owned (but
coefficient estimates were similar), outperform SOEs in Poland.
• Foreign competition increases firm efficiency although may be negative for private domestic firms.
• Wide variation of firm efficiency• Small firms are more efficient than medium and
large firms in Poland
Konings, Van Cayseele and Konings, Van Cayseele and Warzynski (2001b) - Warzynski (2001b) - TransitionTransition
Panel of data: +3,000 manufacturing firms with +100 employees = large representative set taken from Amadeus data set.
2 countries: Bulgaria (2047) and Romania (1701)
look at firms’ market power: check if market power has indeed decreased • analyse price behaviour of firms (price cost
margins) and its determinants – domestic and foreign competition (trade liberalisation) – firm ownership (private domestic, private foreign - fdi -
and state)
Konings, Van Cayseele Konings, Van Cayseele and Warzynski (2001b) - and Warzynski (2001b) - TransitionTransition
Market concentration declining in Bulgaria and Romania and import penetration rising
Argument: trade liberalisation should increase competition and thus decrease price cost margins but some evidence that MNEs implemented in sectors with high market power and receive support from state - Test that in the transition context
Roeger’s (1995) method = no need to deflate
Konings, Van Cayseele Konings, Van Cayseele and Warzynski (2001b) - and Warzynski (2001b) - TransitionTransition
Estimate price cost margins (PCMs) for all the 2-digit industries• first with all years pooled together • for different sectors• using panel data regressions
Results:• Bulgaria:
– import penetration decreases PCMs– high concentration leads to high PCMs– private domestic and private foreign have higher PCMs– foreign firms have the highest PCMs
Konings, Van Cayseele Konings, Van Cayseele and Warzynski (2001b) - and Warzynski (2001b) - TransitionTransition
Results:• Romania:
– import penetration increases PCMs– high concentration does not lead to high PCMs– private domestic and private foreign have higher PCMs
• Conclusions:– PCMs around 20% very similar to the West– private firms increasing market power. State giving
benefits to private foreign– not enought demonopolisation and privatisation not a
good substitute to competition– trade not a disciplinary tool: case if imports do not
compete with domestic production
Konings, Van Cayseele Konings, Van Cayseele and Warzynski (2001a) and Warzynski (2001a)
PCMs of around 20% Import penetration ratios increase
market power for the Netherlands and not significant for Belgium
Policy priorities IPolicy priorities I
Results from study: • Privatisation appears to have the desired
effect so should proceed – but impact decrease with market concentration.
• Competition has desired effects. Privatisation alone not a good substitute for competition. They are complementary.
– So must ensure there is competitive pressure. – More attention should be put on demonopolisation.
• More attention should also be put on trade liberalisation since it reduces market power in highly concentrated markets.
Policy priorities IIPolicy priorities II
Competition policy: • Law and institutions:
– significant efforts made to have both and coherent and integrated with EU law.
– Competition institutions had fruitful activity – but concerns about implementation of fines and
public assistance and law enforcement in general– concerns also about independence of institutions
• removal barriers to exit and entry:– bankruptcy law, anti-trust law and monotoring of
collusive behaviour (mergers and cartels) at local and national level, together with fine implementation
– financial discipline and harder budget constraints– more information to SMEs– competition in the telecommunications and
transportation sectors
Policy priorities IIIPolicy priorities III
Trade policy: • removal of tariffs and non-tariff barriers:
foreign competition is of major importance• international agreements• foreign direct investment
Financial and banking sector in general• development of financial (as well as non-
financial) services suitable to SMEs
general institutional and legal frameworks • protection of property rights• clarification and simplification of licensing
and taxation• law enforcement