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The Effect of Privatization and Competitive Pressure on Firms’ Price-Cost Margins

The Effect of Privatization and Competitive Pressure on Firms’ Price-Cost Margins. Micro Evidence from Emerging Economies Jozef Konings, Patrick Van Cayseele and Frederic Warzynski LICOS, University of Leuven, Belgium. Motivation. Legacy of Central Planning: Many large firms:

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The Effect of Privatization and Competitive Pressure on Firms’ Price-Cost Margins

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  1. The Effect of Privatization and Competitive Pressure on Firms’ Price-Cost Margins Micro Evidence from Emerging Economies Jozef Konings, Patrick Van Cayseele and Frederic Warzynski LICOS, University of Leuven, Belgium

  2. Motivation • Legacy of Central Planning: Many large firms: • Size Distribution 1990 in Selected Countries (Roland, 2000)

  3. Motivation (contd.) • Rapid institutional changes in Central and Eastern Europe: • Privatization • Liberalizing markets (hence increased competitive pressure) • Transition countries are getting close to a natural experiment to evaluate these effects on firm performance, measured here as price-cost margins.

  4. Effects of Privatization? • Traditional Argument Against Privatization:  Firms increase pricesLoss of Allocative Efficiency (Tirole, 1991; Li, 1999; Joskow and Schamelensee, 1995) Ignores dynamic effects of privatization • Due to changed ownership, incentives to engage in restructuring and innovation improve, which lowers costs (Schmidt, 1996; Hart, Shleifer, Vishny, 1997; Bennett and Maw, 2000)

  5. Effects of Competitive Pressure? Contestability argumentprice-cost margins will reduce (evidence: Levinsohn, 1993…) But: In a dynamic context: Trade protection may help to invest in catching-up (Rodrik, 1992) Complementarity between competition and privatization?  Schmidt (1996) shows there is due to the hardening of budget constraints when there is more competition.

  6. Contributions • Previous studies had to rely on small samples of firms, this paper uses a representative panel of firms in Bulgaria and Romania • Estimate price-cost margins using the Roeger (1995) method, which yields consistent estimates, which is in the spirit of recent work that estimates production functions (Olley and Pakes, 1995).

  7. Methodology • Roeger (1995):method for estimating markups using company accounts • Other methods: require price data. • Assume a CRTS production function

  8. Methodology (contd.) • Under perfect competition, the Solow decomposition is:

  9. Methodology (contd.) • Under Imperfect competition (Hall, 1988) with μ = P/MC or this can be written as: (primal Solow residual (1)) where β = (P-MC)/P = 1-1/μ = the lerner index

  10. DATA • Data Source: Amadeus data base of Bureau Van Dijck •  Company accounts of all medium and large sized enterprises of Bulgaria and Romania •  Harmonized by BvD across countries • 1701 firms in Bulgaria and 2047 firms in Romania • Background: Bulgaria: • GDP per capita in 1999: 1513 USD/capita • Population: 8 million • Privatization started late, after 1996 • Competition Policy: weak (EBRD) Romania: • GDP per capita in 1999: 1512 USD/ capita • Population: 22.3 million • Privatization started late, after 1996 • Competition Policy: weak (EBRD)

  11. DATA (contd) • Sample period : 1994-98 • Ownership information only for 1997- 1998 • We dropped those firms for which we could not trace ownership information. Table 1: Comparison between Amadeus and National Statistics, 1998 Sales coverage ratio = total sales in Amadeus / total manufacturing sales. Employment coverage ratio = total employment in Amadeus / total manufacturing employment.

  12. Table 3: Average Ownership Shares in Sample Note: standard deviations in parentheses

  13. Table 4: Types of Ownership (percentage of firms in the sample)

  14. Table 5: Summary statistics Summary Statistics Bulgaria: Sample Means and Standard Deviations

  15. Summary Statistics Romania: Sample Means and Standard Deviations Note: Standard deviations in parentheses; values expressed in thousands of $

  16. Size Distribution of the Sample in 1997

  17. Table 3 Estimates of Price-Cost Margins in Different Sectors

  18. Table 4 Results

  19. Table 5 Results for Highly versus Lowly Competitive Sectors

  20. Conclusions • Privatization is associated with higher price-cost margins • The main effect of privatization is on cost reduction, rather than price increases • The effects of privatization are stronger in highly competitive sectors • International competition disciplines firms’ pricing behavior, in highly concentrated sectors, in lowly concentrated sectors the international competition is associated with higher price-cost margins • Privatization and competitive pressure go together

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