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

Measuring Market Competition in the EU: The Mark-up Approach
competition in the countries under observation. Indeed, across all the main
economic activities in all countries, mark-up ratios are generally statistically
significantly larger than 1. This was widely expected as perfect competition
is rarely observed in reality.
A second result that emerges is that mark-up levels differ considerably
across countries. This observation raises questions regarding the effect of EU
single market. This in part confirms the finding of a study by Badinger (2007)
who found that mark-up ratios have decreased in the manufacturing sector
while they tended to increase in the services sector since 1990s in spite of the
efforts relating to the strengthening of the EU single market.
A third observation that is closely related to the previous results is that
mark-ups are highly heterogeneous across sectors, with industries which
either have particular economic and social characteristics such as agriculture,
fishing, and mining or which are characterised by strong network effects
tending to display higher mark-ups. Such examples are the transport and
communication sectors and the electricity, gas and water sectors.
A related further observation that is noted is that mark-up ratios are on
average higher in services industries than manufacturing industries, and
this seems to hold for all countries under observation. This is not surprising
as manufacturing is likely to be exposed to more international competition
than services. This is illustrated in Figure 3 where the distribution of
manufacturing is skrewed much more to the left than the ratios related to
services. It is also noteworthy that the estimated mark-ups in manufacturing
are relatively concentrated around the median while the estimated mark-up
for the services are more disperse. 2
Factors that Underpin the Level of Market Competition
The analysis can be extended by exploring what factors are likely to
influence the mark-up ratio and hence the level of market competition. A
priori, the smaller the market, the lower the degree of competition as natural
monopolies and oligopolies tend to prevail in small markets. In addition the
2 This can also be confirmed by looking at the mean and median. For services the mean stands
at 1.45 and the median at 1.37 while for the manufacturing sectors the mean is 1.29 and the
median 1.19
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