MEASURING MARKET COMPETITION IN THE EU ... - Bank of Valletta

Measuring Market Competition in the EU: The Mark-up Approach
Mark-up = α + δ1S
+ δ 2D
+ δ 3O
+ ε 1
(5)
Where:
O = Openness and is defined as the average of export and imports as a ratio to GDP;
S = Size measured by the log of GDP;
O = Level of development as measured by GDP per capita.
Estimation of the coefficient can be made by OLS. The results are shown in
Table 1, where the numbers in parenthesis are standard errors.
Table 1
Regression Results
Mark-up = 1.56 -0.02 S -0.04 D -0.17 O
2
R = 0.
48
(0.0076) (0.0248) (0.0770)
n = 20
δ1
< 0; δ 2 < 0;
δ 3 < 0
Table 1 confirms the hypothesis that the level of mark-up in an economy is
negatively related to the size of the economy, to the level of development,
and to the degree of openness of the economy.
Methodology Issues and Limitations
This section briefly highlights limitations associated with the computation
of mark-up using the methodology described in this paper. First, the
estimates are obtained assuming constant returns to scale. This assumption
is debatable especially in small internal market like Malta’s. Secondly, the
different sectors’ output is measured at base price, i.e. including subsidies.
This can lead to higher mark-up values. Thirdly, the lack of data in connection
with capital stock in Malta and a number of other economies can also impair
the accuracy of the estimates.
One must keep in mind that the estimates are backward looking and can be
taken as an average of the period covering 1995 to 2005. This means that
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