DP3703 The Effect of Privatization and Competitive Pressure on Firms' Price-Cost Margins: Micro Evidence from Emerging Economies
This Paper uses representative firm level panel data of 1,701 Bulgarian and 2,047 Romanian manufacturing firms to estimate market power (i.e. price-cost margins) and to analyse how these are affected by privatization and increased competitive pressure. In contrast to earlier work that analyses the effect of ownership on firm performance, the estimation method we use deals with potential endogeneity problems that are associated with estimating firm performance, by making use of the properties of the primal and dual Solow residual.
We find that privatization is associated with higher price-cost margins in both Bulgaria and Romania. Moreover, foreign-owned firms have higher markups than domestic privatized firms and state-owned enterprises. Our results suggest that the sequencing of reforms, such as demonopolization prior to privatization and the establishment of competition policy, may be important. In addition, our results give support to the idea that opening to trade has a disciplining effect on firms’ market power. We find that increased import penetration is associated with lower price cost margins in sectors where product market concentration is relatively high.
Our results can be of relevance for other emerging economies, such as China and Vietnam, which still have to undergo major privatization programs.