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

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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 29
Mario Borg recent reforms are completely ignored. This weakness can be particularly relevant for specific sectors of the economy. Conclusion The paper explored the level of competition in a number of European countries including Malta. The mark-up for Malta was estimated to be 1.32 which is relatively high compared with the economies under observations, in particular in four out of the fifteen economic sectors, namely Financial Intermediation, the Real Estate and Renting, and the Wholesale and Retail sector. From the analysis it also emerged that mark-ups differ considerable across sectors with mark-ups being higher within services than in the manufacturing sectors, which is consistent with the idea that certain services are more sheltered from international competition than are manufactured goods. This paper also found that the level of market competition as measured by the mark-up is positively related to openness while it is negatively related to the size of the economy and the level of development. References AGHION, P., BLOOM, N., BLUNDELL, R., GRIFFITH, R., and HOWITT, P., (2005) “Competition and Innovation: An Inverted-U Relationship,” Quarterly Journal of Economics, 120(2): 701-728. AHN, S. (2002) “Competition, Innovation and Productivity Growth: a Review of Theory and Evidence,” OECD Working Papers: No: 317, Economics Department. BADINGER, H., (2007) ”Has the EU’s Single Market Programme Fostered Competition? Testing for a Decrease in Mark-up Ratios in EU Manufacturing,” Working Paper: 135, Austria Central Bank. GRIFFITH, R., and HARRISON, R., (2004) “The Link Between Product Market Reform and Macro-economic Performance.” Economic Paper: 209, European Commission. HALL, R.E. (1988) ‘The Relation Between Price and Marginal Cost in U.S. Industry,” Journal of Political Economy, Vol. 96 (5): 921-947. 30
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