Article

Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Mark-up Ratios in EU Industries

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Abstract

We use a panel approach, covering 10 EU Member States over the period 1981-99, for each of three major industry groups (manufacturing, construction and services) and 18 more detailed industries to test whether the EU's Single Market Programme has led to a reduction in firms' mark-ups over marginal costs. We address explicitly the uncertainty with respect to the timing of the changeover and allow for a possibly continuous regime shift in a smooth transition analysis. Where regime shifts can be found, the velocity of transition is extremely high, making the linear model a justifiable approximation. We also test for discrete structural breaks in the time window from 1986 to 1996, taking up endogeneity concerns in a generalized method of moments framework. Mark-up reductions are found for aggregate manufacturing (although it is also suggested that mark-ups increased in some manufacturing industries in the precompletion period at the end of the 1980s) and also for construction. In contrast, mark-ups have gone up in most service industries since the early 1990s, which confirms the weak state of the Single Market for services and suggests that anti-competitive defence strategies have emerged in EU service industries. Copyright Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007.

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... The evidence conveys mixed results, as the dumping effects of the lifting of trade barriers may have come with efficiency gains, which in turn would have sustained mark-ups (Allen et al. 1998, Bottasso-Sembenelli 2001, Sauner-Leroy 2003. By considering a large coverage in time and industries, Badinger (2007) finds that the pro-competitive effects prompted by the Single Market Programme (SMP) differ across main sectors, with evidence pointing to a reduction in mark-ups in manufacturing, less so in construction, while a disappointing increase shows up in most service industries. ...
... In what follow we extend Roeger's model to the case of efficiency bargaining applying the same strategy used by Dobbleaire (2004) to extend the Hall's one. This will allow us to compare our results to those of Badinger (2007), who applied the standard Roeger model to study the evolution of mark-ups after the unification of the European market. ...
... The assumption of an instantaneous break may sound very restrictive in view of the delay by which the Single Market Programme has actually taken place as it required changes in the legal and regulatory framework in every country. However available evidence does not reject a fast velocity of transition in case of SMP, and estimates of coefficients seem not to be affected in moving to a non-linear model of transition(Badinger, 2007). This compares with the benefit of simplifying estimation coming from a linear approach, included a convenient control for endogeneity. ...
Article
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In this paper we test for the hypothesis that the EU's Single Market Programme have affected firms mark-ups over marginal costs. Since the Single Market Programme went hand in hand with structural reforms in the labour market and in the institutional setting of important industries (i.e. network industries), we explicitly control for a simultaneous break in the mark-ups and rent sharing between capital and labour. This was done by encompassing both in the theoretical and in the empirical models the hypothesis of efficient bargaining in the labour market. By using industry data for 10 EU countries, we find that without controlling for rent sharing, at the aggregate level mark-up estimates tend to increase in the 1990s. However, once we assume efficient bargaining in the labour market, mark-ups remain virtually unchanged while the share of rents which goes to workers declines. Without controlling for this, a rise in firm profitability due to rent reallocation could be wrongly interpreted as an increase in firms market power. At the sector level this is particularly clear for those industries which went through deep institutional changes and privatisation programmes. In the last part of the paper we tentatively use our results to purge TFP estimates from imperfect competition and rent sharing for Italy and Spain. These countries in the last 10 years experienced a disappointing productivity performance with respect to the past: at least for Italy our preliminary results seem to provide part of the explanation for this evidence.
... (2015), Cafisio (2015), Rose (2000). The data about colonial ties have been included by Rose (2004), Anderson and van Wincoop (2003), Head, Mayer and Ries (2010); Trade policy variables have been analysed by Tinbergen (1962); Baier and Bergstrand (1985;2007; ;Brada and Mendez (1985); Carrère (2006). ...
... Afterwards, many empirical works have applied gravity model to evaluate the effect of various blocs and economic integrations. For example,Aitken (1973),Brada and Mendez (1985);Glick and Rose 2002;Badinger (2007);Head and Mayer (2014) has quantified the economic effect of European Union (EU) and found the positive and statistically significant effects of the single market on trade between the EU member countries; ...
Thesis
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For almost half a century, the gravity model been considered as a cornerstone for empirical analysis of international trade and specifically, for the impact evaluation of different trade arrangements. This paper aimed at estimating the effect on Free Trade Agreements (FTAs) and the membership of the World Trade Organisation (WTO) on bilateral trade. Adding up, the paper goes in search of possible trade creation and trade diversion effect of WTO membership. To this aim, paper exploited a large panel data of merchandise exports between Georgia and trading partners covering over 183 countries during 1992-2015. The gravity equation has been estimated using three alternative methods: First, the Ordinary Least Squares (OLS) with robust errors, second OLS with country-pair fixed effect, and third, Poisson Pseudo Maximum Likelihood (PPML) estimator. An extensive search reveals that presence of FTAs increases bilateral trade by about 63%; Even one trading partner's membership in WTO yields growth in bilateral trade, namely, the WTO membership of exporter and importer countries increases the bilateral trade about 99% and 41% respectively. Finally, research revealed that the membership to WTO has a trade creation effect on member trading partners.
... (2007) Additional 2.18% of EU GDP between 1992 and 2006; an increase in the number of jobs by around 1.35%; most of the impact was static while the dynamic effects (increased investment activity and productivity gains) have been rather small to date. Badinger (2007) In 1981-99 mark-ups were reduced in aggregate manufacturing (although mark-ups increased in some manufacturing industries in the precompletion period at the end of the 1980s) and in construction. In contrast, mark-ups have gone up in most service sectors since the early 1990s, which confirms the weak state of the Single Market for services . ...
... (2006) ;Ilzkovitz et.al. (2007); Badinger (2007) ;Straathof et.al. (2008); Boltho and Eichengreen (2008); Copenhagen Economics (2012); European Commission (2012b) ;Sousa et.al. ...
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The common market is the highest stage of trade integration, which is characterised by a wide range of liberalisation of economic flows including goods, services and factors of production (capital and labour), all within a single regime of competition rules. As a result, we have a more efficient allocation of production factors as well as many other benefits. These benefits can be considered as resulting from liberalisation of economic flows (e.g. a more fierce market competition, a decline in unit costs of production, a better quality of products, economies of scale, an increase in trade and foreign direct investment flows, technology spillover effects, a rise in productivity of production factors, an acceleration of economic convergence process within the regional bloc etc.) and may contribute to the accumulation effects like GDP growth as well as to an increase in economic power and competitive advantage of the group of integrating countries in the world economy. The aim of this paper is: 1) to compare theoretical gains from market integration with its real outcomes in the European Union and to assess the extent to which actual effects differ from potential benefits; 2) to identify the areas within the EU internal market where an integration process is not complete and the market does not deliver potential benefits; 3) to explain the reasons of the EU common market's sub-optimal performance, i.e. why it does not produce all the benefits that were expected from trade integration. The following research methods have been used: review of literature, empirical studies, reports of international organisations and EU documents concerning the subject as well as an empirical analysis of economic indicators measuring the internal market performance and its impact on the whole EU economy. The analysis was mainly based on statistical data from the European Commission and OECD. The analysis conducted reveals that real outcomes of market integration process in the European Union differ significantly from those expected both in theory of economic integration as well as in empirical studies aimed at estimating potential gains from the EU common market. Empirical analyses confirm that creating an internal market has realistically increased GDP in the EU by some 2-3% instead of 4.25-6.5% or more assumed in ex ante studies in the late 1980s. There is little evidence to support the claim that market integration allowed EU firms to be more productive, made it possible to exploit untapped economies of scale or contributed to substantial improvement in allocative efficiency. Nevertheless, some positive effects can be confirmed including increased competition, lower and more converged prices as well as higher exports and imports in the goods market, i.e. mainly in industrial sectors. In the freedom of services and labour there is still some potential available. The main obstacles to effective functioning of the EU internal market are: the lack of fully integrated market for services as well as of elastic labour markets, low labour mobility, less developed capital markets and low ICT-related capital expenditures as compared to the US, the lack of effective embracement of ICT technologies, fragmented public procurement markets, various tax administration burdens in member states, insufficient use of the principle of mutual recognition, underdeveloped infrastructure across the EU, but also structural problems of EMU and bad economic situation in the euro area.
... 44 We complement these estimates with those in Oliveira Martins, Scarpetta and Pilat (1996) by country and sector. In addition, we use similar estimates provided by Halpern and Körösi (2001), Estrada and López-Salido (2005) and Badinger (2007) for countries not covered by Oliveira Martins et al. 45 The weights are highest for the labour factor, representing (across countries and sectors) 68.1 per cent of the total production costs on average, while capital and energy represent 18.8 per cent and 13.1 per cent respectively. The sectors with the highest energy shares are non-ferrous metals (23.9 per cent), iron & steel (25.5 per cent) and non-metallic minerals (17.7 per cent); those with the highest labour shares are textiles & leather (80.2 per cent), machinery (78.4 per cent) and transport equipment (73.6 per cent); and those with the highest capital shares are chemicals & petrochemicals (24.0 per cent), transport equipment (22.7 per cent) and food & tobacco (22.5 per cent). ...
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This paper provides novel evidence on the multi-factor Effective Marginal Tax Rates (EMTRs) for a sample of 17 OECD countries and 11 manufacturing sectors. We use a single framework encompassing capital, labour and energy taxes. Our cross-country/cross-sector approach allows us analysing the contributions of these input factors to the effective tax borne by firms, taking explicitly into account their degree of substitution, their tax incidence and the role of mark-ups. We find that the labour tax plays a particularly important role in the overall level of EMTR and that the presence of mark-ups can significantly alter the levels of the multi-factor EMTR, although without significantly altering the ranking of countries. We also find that the bulk of the variation in EMTRs is across countries, rather than across sectors (within countries). This article is protected by copyright. All rights reserved
... More indirect evidence is provided by Badinger (2007) who investigates whether the Single European Market had the expected effects of lowering markups and unleashing the competitive forces it was predicted to bring. This is a particularly interesting article for our purpose, because it considers 18 sectors, 5 of them service sectors, including Wholesale and Retail Trade. ...
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A survey of facts and recent research on the role of retailers in international trade
... However, the empirical studies on EGs assume a constant elasticity of substitution even if recent research has highlighted the fact that reducing trade costs may lead to increased competition and lower margins (e.g. Melitz and Ottaviano, 2008;Feenstra and Weinstein, 2010;Badinger, 2007;Chen, Imbs and Scott, 2009). Given the structure of production and international trade in the EGs sector, assuming a constant elasticity of substitution is more difficult to justify. ...
... Informationsmaßnahmen werden aufgrund des Artikels 284 (ex-Artikel 213) EGV erlassen, der der Kommission Inspektionsbefugnisse "zur Erfüllung der ihr übertragenen Aufgaben" zuerkennt. 48 Kompetenzgrundlage wenig attraktiv 55 , da jedem der 27 Mitgliedstaaten de facto ein "Vetorecht" eingeräumt wird. ...
... However, the empirical studies on EGs assume a constant elasticity of substitution even if recent research has highlighted the fact that reducing trade costs may lead to increased competition and lower margins (e.g. Feenstra and Weinstein 2010;Chen et al. 2009;Melitz and Ottaviano 2008;Badinger 2007). Given the structure of production and international trade in the EGs sector, assuming a constant elasticity of substitution is more difficult to justify. ...
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Negotiations on the liberalization of environmental goods (EGs) and services within the WTO Doha Round (mandated in November 2001) are facing specific challenges. Conflicting interests and differing perceptions of the benefits of increased trade in EGs were reflected in different approaches proposed for determining EGs. Using import data of 34 Organisation for Economic Co-operation and Development (OECD) member countries and from a sample of 167 countries, from 1995 to 2012, we discuss the trade effect of reducing barriers on EGs. We analyze the lists of EGs proposed by the Asia-Pacific Economic Cooperation and OECD using a Translog gravity model. We found that removing tariff barriers for EGs will have a modest impact because for the biggest importers and exporters, elasticities of trade costs are very low while for most trading relationships they are very high, making it difficult for exporters to maintain their markets. Overall, our results suggest that, because of their substantial effect on international trade, future negotiations on EGs should also address the issues of standards and nontariff barriers.
... However, the freedom of cross-border movement of capital is one of the four pillars of the single market. By reducing restrictions on capital flows across EU member states, the single market deepens EU integration by increasing competition and specialization (Badinger, 2007) and by improving the allocation of resources and generating economies of scale and scope (Baldwin, 1989). Associated with this, the diffusion of best managerial practises and new products is also expected to foster innovation and ultimately to increase productivity. ...
... where θ t is a Hicks-neutral productivity term. With imperfect competition in product markets, Hall (1988) showed that the primal Solow residual will be 11 International trade studies using the Roeger method are, e.g., Konings and Vandenbussche (2005) and Badinger (2007). See Tybout (2003) for a discussion of alternative ways to estimate markups. ...
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We analyze empirically export-price strategies across export destinations using detailed firm-product data. Most recent studies using disaggregated data to investigate why firms charge different prices for the same product on different markets focus on the cost component of prices and neglect the markup component. In this paper, we concentrate on the markup component and examine how variations in firms’ export prices may reflect price discrimination by comparing the markup of firms with different pricing strategies. We make use of detailed firm-level data for exporting firms in the Swedish food sector consisting of both manufacturing and intermediary trading firms. The paper documents the export-price variations within the two sub-sectors and explores how different price strategies correlate with markups. The results offer new information beyond the fact that exporters tend to have a higher markup. In particular, we find that firms in the food-processing sector with a greater ability to discriminate across markets mark their products up even more. This result points to the importance of underlying firm decisions in order to explain differences in export premiums across firms. In addition, the results reveal that markups are a complex function of firm and destination characteristics, and that the relationship between markups and pricing strategies in the manufacturing sector is not necessarily observed in other sectors of the supply chain.
... Boulhol (2010) surveys the existing evidence on the competitive effect of imports and points out that, although there does exist some support for a competition enhancing effect, "the weak consistency of the quantified effects across studies does not match the depth of the theoretical intuition" (ibid.: 328). 1 1 Alternative competition measures that refer to the market structure rather than the market It is also common practice in the empirical literature to use significant events of trade liberalization to evaluate their impact on markups and competition. For example, Badinger (2007) analyzes the EU's Single Market Programme for ten EU member states over the period 1981-1999. Bottasso and Sembenelli (2001) look at the impact of the European Single Market Accession for Italian firms. ...
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This study evaluates the pro-competitive effect of foreign market penetration with a broad firm-level database that covers manufacturing industries in six European countries. The main contribution is the demonstration of the heterogeneous effects on host country competition of the two main channels of foreign market penetration that have been assigned fundamental differences by economic theory: imports and foreign direct investment. The results of dynamic estimates of firm-level markups reveal a pro-competitive effect of imports, while foreign direct investment shows no clear overall impact, suggesting a cancelling out of competitive pressure and spillovers. These findings matter for both future empirical research and policy considerations that must weigh the positive and negative effects of foreign market integration on the competitive environment and consumer welfare.
... There is ample evidence at international and industry level that perfect competition does not prevail with price e marginal cost ratios in the region of 1.3 being found e though there is significant variation by country and industry (e.g. Badinger, 2007;Christopoulou & Vermeulen, 2008). Unfortunately available evidence is almost exclusively focused on industry classifications and does not distinguish by area type (beyond nation states), though Richards, Acharya, and Kagan (2008) found that 38% of the economic surplus of non-metropolitan banks was due to spatial market power. ...
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Remote rural areas tend to experience slower population growth (sometimes decline), slower growth in GDP, fewer employment opportunities and lower productivity relative to the economy as a whole. Transport policy interventions are typically focussed on addressing structural economic weaknesses. Yet despite a strong general interest in wider economic benefits, their relevance to schemes in remote rural areas has received very little previous discussion. We argue that remote rural areas are likely to exhibit market distortions in the goods and labour markets, primarily arising from a lack of alternatives and choices in these areas. We also illustrate the empirical importance of the wider economic benefits, caused by these distortions. Using case studies from the Highlands and Islands of Scotland to do so. We find that focusing the cost benefit analysis only on the primary transport market can significantly underestimate welfare benefits, and that the degree of underestimation varies significantly case by case. It is highest for schemes where the impacts on business and employment are large and where all of the output and employment effects occur in a remote rural area.
... As a result, average industry productivity grows and consumer prices fall. This productivity-enhancing effect of creative destruction has been demonstrated for Canada by Trefler (2004) under the Canada-US Free Trade Agreement, and for a broader sample of countries and free-trade agreements by Badinger (2007aBadinger ( , 2008; for evidence on Chile and Mexico, see also Tybout, de Melo, and Corbo 1991;Tybout and Westbrook, 1995). As an example of this literature, Trefler (2004, p. 870) finds that: ...
Article
The modern theory of international trade identifies several additional sources of the gains from international trade beyond the gains from traditional comparative advantage. These are the gains from importing new product varieties; the gains from “creative destruction” as the relatively most productive firms expand their output by exporting while the less-productive firms exit; and the gains from competition between firms in different countries, which can lead to reduced markups. Estimates of these various gains are provided for the United States and other countries.
... The econometric analysis shows that the markup of the firm has decreased after the trade open policy. Harald Badinger (2007) used the panel data of the 10 member states of the European Union from 1981-1999 to study the impact of the EU unified market on the markup of firms. The promotion of trade integration has a structural effect. ...
... While Bellone et al. (2008) found that the European Single Market Program (SMP) 2 had a negative impact on profit margins in French manufacturing industries, Cook (2011) reports a rise in profit mark-ups following the Euro implementation, even though a single currency would be expected to promote competition. Badinger (2007) analyzed the effect of the SMP for ten countries at the sectoral level (manufacturing, construction, and service sectors). He found a decline in profit mark-ups in the manufacturing industry (although some sub-sectors exhibited a rise in profit mark-ups during the 1980s); the SMP affected the construction sector to a lesser degree, and profit mark-ups in the service sector have risen since the mid-1990s. ...
... To z kolei doprowadziło do redukcji marży firm, z korzyścią dla konsumentów, a dalej do redukcji cen. Badinger (2007) Bezpośrednie inwestycje zagraniczne wzbudzają niekiedy emocje w Polsce i w innych krajach przyjmujących kapitał. Trzeba jednak zauważyć, że w gospodarce otwartej uzupełniają one inwestycje krajowe, chociaż mają czasami wyższy koszt (transfer zysków za granicę) dla kraju goszczącego niż wydatki inwestycyjne, finansowane z oszczędności krajowych. ...
Chapter
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W ostatnich latach wzrosło znaczenie sektora przemysłowego w globalnej gospodarce, co znalazło odzwierciedlenie w rosnącym zainteresowaniu polityków gospodarczych oraz w regulacjach i inicjatywach wspólnotowych. Przystąpienie do Unii Europejskiej w maju 2004 r. było bardzo ważne dla gospodarki polskiej, a w szczególności dla sektora przemysłowego. Włączenie do wspólnego rynku, przyjęcie europejskich standardów jakości produkcji oraz regulacji związanych z ochroną własności intelektualnej wytworzyły warunki do nawiązania współpracy z zagranicznymi, zaawansowanymi przedsiębiorstwami, w szczególności w ramach rozbudowanych łańcuchów wartości. Procesy te przyniosły dwa wymierne efekty, sprzyjające podnoszeniu jakości produkcji przemysłowej: po pierwsze, doprowadziły do wielokrotnego zwiększenia wymiany handlowej, a po drugie, ułatwiły absorpcję nowych technologii i specjalistycznej wiedzy. Istotne jest, że pozytywne zmiany w polskim przemyśle nie były bezpośrednią pochodną aktywnej polityki i narzędzi unijnych w tym zakresie, które do niedawna koncentrowały się na regulowaniu – de facto ograniczaniu – roli państw członkowskich we wspieraniu ich narodowych przemysłów tak, aby nie podważało to jednolitego rynku i uczciwej konkurencji.
... Measuring competition intensity is particularly relevant for the European Union (EU) since one of the main goals is to increase economic integration among country members towards the creation of a single market. Over the years, this process has increased competition intensity across firms by driving prices towards marginal costs and lowering markups (see, for instance, Badinger 2007;Griffith et al. 2010). Two important dimensions are generally not considered in this context. ...
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Using firm-level data between 2004 and 2012 for 11 countries of the European Union (EU), we document the size of product and labour market imperfections within narrowly defined sectors including services which are virtually undocumented. Our findings suggest that perfect competition in both product and labour markets is widely rejected. Levels of the price-cost margin and union bargaining power tend to be higher in some service sectors depicting, however, substantial heterogeneity. Dispersion within sector and across countries tends to be higher in some services sectors assuming a less tradable nature which suggests that the single market integration is partial, particularly relaxing the assumption of perfect competition in the labour market. We report also figures for the aggregate economy and show that Eastern countries tend to depict lower product and labour market imperfections compared to other countries in the EU. Also, we provide evidence in favour of a very limited adjustment of both product and labour market imperfections following the international and financial crisis.
... Coming back to the first point, there is solid evidence that economic integration in the form of the Single Market has defragmented markets and has increased competition, as a growing number of firms are squeezed out of the market, while fewer firms compete with each other (Allen et al., 1998;Baldwin and Wyplosz, 2019). Badinger (2007) andChen et al. (2009) show that competition in the Single Market has led to a significant reduction in profits, thus providing incentives to firms to lower wages to market-determined rates. ...
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How does European integration affect the welfare state? This paper argues that European integration has non-complementary consequences for the political economy of welfare spending: European economic integration increases popular demand for social spending, whereas European political integration decreases the supply of social spending. Thus, the conflicting implications of European integration essentially break the link between social policy preferences and social policy. Using statistical models that deal with the multilevel structure of the theoretical argument, we find a positive relationship between economic integration and support for social policy. In the second part of the empirical analysis, dynamic model specifications at the country level show that higher levels of political integration are associated with lower levels of social spending. Furthermore, we provide evidence that social policy responsiveness declines as political integration increases.
... 5 When ! 1, the equilibrium is a corner solution, and condition(19) no longer applies. ...
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This paper compares social welfare for a unit versus a proportional fee on competing networks. When demand is sub‐convex or isoelastic, proportional fee welfare dominates unit fee and the comparison is independent of network competition. When demand is super‐convex, however, unit fee welfare dominates proportional fee if network competition is sufficiently weak. Dominance of unit fee is more likely when network competition weakens or if merchants must single‐home. For competing networks, proportional fee is each network’s dominant strategy but often leads to a Prisoners’ Dilemma that hurts not only networks but also merchants.
... See Edwards 1992;Dollar 1992;Sachs and Warner 1995;Greenaway, Morgan, and Wright 1997;Ades and Glaeser 1999; Wacziarg and Horn Welch 2008. 3 Measured in terms of INV to GDP ratio (INV/GDP), and typically via foreign direct investment (FDI) as a mediating variable; seeBaldwin and Seghezza 1996; Wacziarg and Horn Welch 2008. 4 Measured in terms of the so-called 'openness ratio'; seeWacziarg and Horn Welch 2008. 5 See Harris 1984;Smith and Venables 1988;Badinger 2007. 6 See Feenstra 1994Hummels and Klenow 2005;Broda and Weinstein 2006. ...
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In this article, I offer a methodological analysis of the empirical research on the causal effects of trade liberalisation, and assess whether such studies can be of any use for guiding policy prescriptions in real-world economies. The analysis focuses on the mainstream economic research that has been used to support arguments in favour of trade liberalisation during the last decades. Even though there are empirical results that could be taken as valid evidence for a causal connection between free trade and economic gains, none of the existing evidence licences trustworthy inferences about the policy effectiveness of trade liberalisation reforms in real-world cases. There are three aspects of the empirical literature that make it highly problematic for making reliable policy inferences: (a) the criteria used to define the notion of ‘free trade’, (b) the background assumptions embedded in the econometric techniques used for estimating causal effects, and (c) the widespread desire among academic economists to attain scientific results in terms of universally valid generalisations. The analysis exposes a worrisome mismatch between, on the one hand, the research aims and outcomes of scientific economics and, on the other, the kind of evidence that would be useful for guiding actual policy deliberations.
... On the other hand, when the relative love for variety decreases, the market generates price-increasing effects, that is, a larger number of firms, a bigger market, or both lead to higher prices because the elasticity of substitution now decreases. Although at odds with the standard paradigm of entry, this result agrees with several recent contributions in industrial organization (Amir and Lambson (2000), Chen and Riordan (2007)) as well as with empirical studies showing that entry or economic integration may lead to higher markups (Ward, Shimshack, Perloff, and Harris (2002), Badinger (2007)). They should not be viewed, therefore, as exotica. ...
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We propose a model of monopolistic competition with additive preferences and variable marginal costs. Using the concept of "relative love for variety," we provide a full characterization of the free-entry equilibrium. When the relative love for variety increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The constant elasticity of substitution is the only case in which all competitive effects are washed out. We also show that our results hold true when the economy involves several sectors, firms are heterogeneous, and preferences are given by the quadratic utility and the translog.
... One study that examines the impact of the Single Market on mark-ups is Badinger (2007). This paper uses a panel approach, covering 10 EU Member States over the period 1981-99, to test whether the EU's Single Market Programme has led to a reduction in firms' mark-ups over marginal costs. ...
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This paper examines the macro-economic benefits of the Single Market in goods and services by simulating a counterfactual scenario in which tariffs and non-tariff barriers are reintroduced. In this counterfactual scenario, intra-EU trade flows are significantly reduced. Lower trade openness also means reduced market size and less competition. Using empirical evidence on the effect of the Single Market on firms’ mark-ups over marginal costs, we add these competition effects and arrive at a total estimate of around 9% higher GDP on average for the EU, but with a strong degree of heterogeneity across EU countries.
... There is empirical evidence of reduction of markups due to more competition following dramatic trade liberalization for some countries. For example, Badinger (2007) finds a decrease of markups in aggregate manufacturing sectors following the EU's Single Market Programme. Some literature discover that trade liberalization of intermediates inputs may lead to markup increase due to various reasons. ...
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The rise of market power in recent decades has received increased attention, but the determinants of such a rise remain unclear. This paper studies whether and how increasing import penetration of inputs leads to a more concentrated market structure and the associated rise of markups. The use of quadratic preferences in combination with the inclusion of the firm’s choice to import create a link between the use of imported inputs and markups. A reduction in importing costs induces non-importers to start importing intermediates. Yet, the effect on profits is shaped by a trade-off between the potential marginal cost advantage and the fixed cost incurred from importing. As a result, only the most productive firms benefit from globalization, while existing importing firms do not fully pass through the reduction in trade costs using prices. The selection of importers, cost-savings from imported inputs and industry firm turnover jointly explain the rise of average markups in the market. Guided by this theoretical framework, we combine firm-level panel data, sectorlevel trade data and input-output tables to present empirical evidence on the relationship between the increase in imported input penetration and the rise of market power in the US over the last four decades. Using six-digit sectors as the unit of observation, we show that imported input penetration is positively associated with the size of markups in the manufacturing sectors while the effect of imported output penetration is insignificant in these sectors. We test the model predictions on both the import decisions of heterogeneous firms and its implications for market structure. A difference-in-difference exercise that exploits China’s accession to the WTO, we provide additional supporting evidence. Overall, we find that average industry markups increase by around 3.52 percent point in react to 10 percent point increase of the imported input penetration ratio in manufacturing sectors, contributing to around 31.1% of the total markup increment in these sectors between 1980 and 2014. However, such positive effect on markups is failed to be found in the services sectors.
... First, increased trade is associated with increased product market competition. Badinger (2007) shows that competition in the Common Market has led to a significant reduction in firms' mark-ups over marginal costs both in manufacturing and construction industries. Consequently, increasing competition weakens trade union power due to a decrease in capturable profits (cf. ...
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What are the distributional implications of European institutional integration? This article argues that European institutional integration exerts a moderating effect on the relationship between trade union strength and income inequality—particularly inequality at the top—within countries of the European Union (EU). I contend that European institutional integration reduces the bargaining power of trade unions due to rising market competition and decreasing union control over the supply of labor. Thus, the effectiveness of trade unions in reducing inequality should decline with progressing European institutional integration. On the basis of a long-term within-country analysis of the EU15, I will show that the effect of trade unions on inequality varies strongly with European institutional integration. Consistent with the theoretical argument, the inequality-reducing effect of trade unions becomes substantially lower the more a country integrates in the EU.
... However, the freedom of cross-border movement of capital is one of the four pillars of the single market. By reducing restrictions on capital flows across EU member states, the single market deepens EU integration by increasing competition and specialization (Badinger, 2007) and by improving the allocation of resources and generating economies of scale and scope (Baldwin, 1989). Associated with this, the diffusion of best managerial practises and new products is also expected to foster innovation and ultimately to increase productivity. ...
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This paper explores the impact of EU membership on foreign direct investment (FDI). It analyses empirically how the effects of such deep integration differ from other forms and investigates what drives these effects. Using a structural gravity framework on annual bilateral FDI data for almost every country in the world, over 1985-2018, we find EU membership leads FDI into the host economy to be about 60% higher for investment from outside the EU, and around 50% higher for intra-EU FDI. Moreover, we find that the effect of EU membership on FDI is larger than from membership of NAFTA, EFTA, or MERCOSUR, and that the Single Market is the cornerstone of this differential impact.
... Thus, the residual can be decomposed into a market power term and a productivity term with β being directly related to the markup, μ, of price over marginal cost by = 1/ (1-). 14 11 International trade studies using the Roeger method is, e.g., Konings & Vandenbussche (2005) and Badinger (2007). See Tybout (2003) for a discussion of other ways to estimate markups 12 The drawback with Roeger's method is that it relies on the assumption of constant returns to scale. ...
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We empirically analyze product price variation across export destinations using detailed firm-product data. Recent studies using firm level data emphasize variations in product quality as an important explanation as to why firms charge different prices for the same product on different export markets. In this paper, we take an alternative approach and explore whether variations in firms' export prices reflects market segmentation by investigating the relationship between price variation and firm markup. In particular, we study firm's variation in unit value export prices of each product going to different locations and investigate whether larger price differences are associated with higher markups. We make use of detailed firm level data for the Swedish food and beverage sector and analyze individual firms' export prices to European as well as non-European markets. By defining products at a highly disaggregated level (the 8-digit level of the Combined Nomenclature), we minimize the scope for product quality differences determining price variations within firms. Our results suggest that firms with higher markups display larger price variation across export destinations and that markups are higher for firms with more local markets. This segmented market explanation as to why firm export prices differ is of particular relevance when it comes to competition and market structures within the European Union.
... 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. ...
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A competitive and well-functioning market is imperative for the efficiency of the economy. The reasons are various; however, they can be grouped into two categories. First, competitive markets help correct distortions in the structure of production and thus raise productivity levels and secondly, stronger competition provides an increased incentive for producers in the form of lower prices, higher quality and increased variety. Having a general estimate of the level of competition of the local market can provide useful information about internal market functioning. This paper provides an estimate of the level of market competition for Malta and a number of other economies. This permits a direct analysis of which sectors of the economy are operating near their marginal cost function.
... For instance, the price markups estimated by Martins, Scarpetta, and Pilat (1996) vary between 10% and 30% (i.e., η = 1.1 and η = 1.3) across 14 selected OECD countries including the United States. Despite these relatively low figures, the price markup estimates of 10 selected OECD countries by Badinger (2007) lie between 30% and 50% (i.e., η = 1.3 and η = 1.5). Yet, according to Cooper (2004), price markups up to 50% (i.e., η = 1.5) should be considered as medium. ...
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The labor share in the income of Turkey is confoundingly low according to official figures. By comparison, the average labor share of OECD members is two times higher than that of Turkey. Is this because labor productivity is low, or is it because imperfect competition, which amplifies profits, is overwhelmingly high in Turkey? We estimate preferences, technology parameters, and price markup in a dynamic general equilibrium model to answer this question using GMM. To our surprise, the results suggest that the crucial factor suppressing the share of labor in Turkey is high price markup, and the role of low productivity of labor is negligible. The results are robust to the use of different instrumental variables.
Article
L’objectif de ce papier est de présenter une sélection de contributions théoriques étudiant l’effet de l’intégration internationale des marchés sur la concurrence effective. L’analyse est menée en termes d’équilibre partiel. Elle mêle concurrence oligopolistique et intégration imparfaite et met l’accent sur les comportements stratégiques des firmes permettant ainsi de ne pas réduire le champ décisionnel des firmes au simple ajustement de leurs volumes de production ou de leurs prix. En cela, cette littérature relève d’une « économie industrielle de l’intégration internationale ». Le principal résultat auquel aboutissent les contributions présentées est qu’un accroissement de l’intégration internationale n’entraîne pas nécessairement un renforcement de la concurrence et, en corollaire, qu’une intégration plus poussée des marchés doit s’appuyer sur une politique de la concurrence renforcée et/ou une politique industrielle adaptée.
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U.S. investors abroad receive a higher return on their assets than their counterparts that invest in the United States. I examine the degree to which excluding intangible assets and repatriation taxes from the international transactions accounts can account for this gap. Using a growth accounting framework, I find that adjusting for these exclusions cuts the gap by more than half. The overall returns gap is nearly eliminated when the adjusted FDI rates of return are applied to the overall overseas asset portfolio. The results suggest a portion of the gap is persistent.
Article
This paper studies the effect of EU harmonisation of food regulations on time-varying, firm-heterogeneous mark-ups using data on Dutch food-processing firms during 1992–2005. EU product standard harmonisation is measured using data at the 8-digit combined nomenclature product level. EU harmonisation generates short- and long-run pro-competitive effects: on average, an increase of 50 per cent in the sales-weighted coverage ratio of EU harmonisation leads to a decrease in mark-ups of 7 per cent after 1 year and by 11.5 per cent in the long-run. By taking account of firm heterogeneity, I show that this pro-competitive effect is more pronounced for (i) small firms, (ii) more concentrated firms, (iii) single-product firms, (iv) firms belonging to food sub-sectors which are less affected by EU harmonisation and (v) during the first half of the sample period.
Article
The paper uses the QUEST III model to analyse the question of whether nontradable (service) sector reform would reduce external imbalances in monetary union, notably from the side of surplus countries. It considers an open economy with a positive net foreign asset (net creditor) position and shows that tradable and nontradable sector reforms, understood as reforms that shift the supply curve in the respective sector outward, tend to have similar external balance effects. Namely, supply-side reforms improve the price competitiveness of domestic output and tend to increase the trade and current account balance on impact. In the longer term, competitiveness gains are compensated by additional imports associated with domestic income growth. Starting from a non-zero NFA position, the denominator effect does also contribute significantly to changes in external accounts relative to GDP. The results are robust across modifications of the model.
Book
Die wirtschaftliche Entwicklung und der Wohlstand der Gesellschaft sind eng mit dem Handel und Außenhandel verknüpft. Dies trifft auf ein kleines Land wie Österreich in besonderem Maße zu. Wie wichtig der Außenhandel für die österreichische Wirtschaft, für die Schaffung von Arbeitsplätzen und für die Teilhabe weiter Teile der Gesellschaft an Wohlstand und Lebensqualität ist, wird in diesem Bericht vorgestellt. Die daran geknüpften Herausforderungen werden ebenfalls benannt und leiten über zu den Themen, die in der Mainstream-Ökonomie wenig beachtet werden, viele Menschen aber stark bewegen. Dazu zählen Fragen wie, ob Handel nicht per Saldo mehr Arbeitsplätze vernichtet oder zur Senkung von Standards der Qualität der Arbeitsplätze, der Lebensmittel oder der Umwelt beiträgt. Der Güterhandel ist über weite Strecken mit negativen Umwelteffekten verbunden. Wie hoch sie sind, ist zwar nicht allgemein bekannt, wird in der ökonomischen Literatur aber breit diskutiert. In der vorliegenden Arbeit werden die Befunde der Literatur zu diesen Themen zusammengetragen, gesichtet und im Hinblick auf eine Außenhandelsstrategie hin bewertet.
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The Pro-Competitive Effect of European Integration We analyse the evolution of French mark-ups and their determinants in manufacturing industries from 1986 to 2004, using an extended version of Roeger’s specification. With a value of 13.8%, French mark-ups in manufacturing are found to be slightly above those found by Görg and Warzynski (2006) in UK manufacturing. Over the period, French mark-ups have gone down by 4 to 5%. We interpret this as being the pro-competitive consequences of European integration. We also find that the implementation of the Euro in 2002 has been associated with an increase of mark-up by 2%. French mark-ups are contra-cyclical and depend upon openness to international trade, industry concentration. These stylised facts must not conceal the fact that sectors are highly heterogeneous, where price determination by firms is highly sector specific. JEL Classification: D43 ; L1 ; L6 ; F14
Article
Using a geo-coded micro-level panel dataset for Spanish manufacturing firms, I estimate the effect of access to highways on firm-level productivity. To identify the causal effect of highways, I have relied on different fixed-effects specifications, instrumental variables and controls for geography, geology and history. Since highways also attract economic activity, leading to local density increases, which in turn could affect productivity through agglomeration benefits, I also present estimations that control for local employment densities. The results show that highways raise firm-level productivity directly and beyond the effect of density. Additional results show that highway benefits are unevenly distributed across sectors and space.
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The case for major transport investment is frequently made in terms of impact on economic performance. A recurring difficulty however faced by policy makers is a disjoint between this motivation and the cost benefit analysis, which may be too narrow. Broadening the set of economic mechanisms studied creates the risk that bad arguments are legitimised and effects can be exaggerated. There is a need for an appraisal framework that ensures all relevant impacts are captured, ensures the opportunity cost of drawing more resources into an activity is identified and meets the needs of the different audiences of the appraisal. There is a need for context specific appraisal. Central to the impact on economic performance is how private sector investment responds to changes in accessibility. Investment in one location can improve productivity, create growth, but may also displace output and employment. Thus we group impacts within the framework into four types: user benefits, proximity and productivity effects, investment and land use impacts and employment effects. Within each of these groups there are a series of transport-economy mechanisms which become relevant in different contexts. Some of these mechanisms are well established and are applied in practice. Others still are more challenging and need to be the subject of further research. Throughout improvements in the evidence base are needed.
Chapter
The economic impact upon trade was the primary concern expressed by the opponents of Brexit during the recent referendum campaign.
Article
Measuring markups in restaurant services is a difficult task. Although the sales price is observed, cost of the product served is unobserved. In this study, we employ an intuitive framework and focus specifically on markups on soft drinks. We analyze the determinants of markup on soft drinks in restaurants over 2006–2014. Results suggest that current demand conditions (net minimum wage, output gap), major cost items (food and energy prices, exchange rate) and economic uncertainty (exchange rate volatility) significantly affect markups. This strategy enables the detection of relevant factors which may not be possible to detect in other settings.
Article
This study aims to develop a productivity index which takes into account the multidimensional characteristics of productivities. Our multidimensional productivity index (MPI) not only measures individual productivities of economic resources but also evaluate productivity enhancing general capacities of economy. Individual productivity indices such as labor productivity are limited because they do not consider the factors, such as the globalization of economies and the market and institutional variables, that could have profound impacts on productivity. The multidimensional Productivity Index (MPI) is measured for 60 countries including 23 OECD countries and 10 Asian countries. Our methodology employs the concept of technical efficiency that allows us to measure the extent to which institutional and market factors contribute to the economic performance. Our findings indicate that standard productivity measures such as labor productivity may overestimate the overall productivity differences across the economies.
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This paper presents evidence that consumption is an important drive factor contributing to dynamic industrial upgrading in urban China. This paper investigates how consumption value and variations influence TFP growth and the number of new patents, and how the profit, exports, and share of the private sector influence the relation between consumption and industrial upgrades. The household and firm matching dataset from 1998 to 2007 is employed. The results suggest that both consumption value and variations positively affect TFP growths and increase the number of new product patents. This influence appears in both the agricultural and manufacturing industry sectors. Scrutiny of the channels of the influence of consumption on industrial upgrades indicates that profit rate is significantly associated with the consumption-industrial upgrade linkage but exports do not contribute to industrial upgrades in the domestic market. Growth in the consumption of new products in the private sector significantly stimulates industrial upgrades.
Chapter
We investigate the long-term drivers of the labor share in Japan using data from the Japanese Industrial Productivity database from 1970 to 2012. The descriptive and econometric results indicate that the decline in the labor share observed in Japan during the period of analysis was highly concentrated in the low-knowledge-intensity sectors, the employment share of which has increased remarkably. These sectors also experienced a strong increase in non-regular workers, who constitute a secondary segment of the labor market in Japan, characterized by low wages and very limited union coverage. The low level of protection of this group of workers and the increase in market power concentration have probably contributed to reducing the bargaining power of labor vis-à-vis employers and, consequently, the labor share.
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This paper addresses two main questions: (a) Has European integration hindered the implementation of labour, financial and product market structural reforms? (b) Do the effects of these reforms vary more across sectors than across countries? Using more granular reform measures, longer time windows and a larger sample of countries than previous studies, we confirm that the euro triggered product but neither labour nor financial market reforms. Differently from previous studies, we find that: (a) the Single Market has similar effects to the euro, and (b) sectoral heterogeneity appears less important in explaining the economic impacts of reforms than country heterogeneity.
Chapter
The impact of Brexit upon trade has been the primary concern for most economists since the lowering of trade barriers and resulting reductions in trade costs are viewed as overwhelmingly positive. The economic theory relating to trade integration and growth is considered, before noting the results of those studies which have sought to estimate the impact of EU membership over time. One conclusion drawn from the evaluation of the evidence is that trade integration would appear to have positive economic results, but that the UK has had a much lower rate of benefit than other EU member states, perhaps due to the fact that most of its exports are destined for other parts of the globe and hence it is less tightly integrated into the European market. Potential effects arising from the re-imposition of tariff and non-tariff barriers are examined, noting that different sectors are likely to experience quite different effects. Finally, the conclusions reached by a range of studies into the possible trade effects of different variants of Brexit are examined and broad conclusions reached.
Chapter
This chapter examines the macroeconomic benefits that membership of the Single Market has given to the 11 Baltics, Central and South Eastern European countries that joined the EU after 2004. We find that these EU11 countries have benefitted particularly from membership of the internal market because of their high degree of openness and their strong trade integration within the EU. The analysis is conducted with the macroeconomic model QUEST that distinguishes between all EU member states and the rest of the world. We capture both the direct welfare effects for consumers from the reduction of tariffs and non-tariff barriers but we also consider indirect effects on income which work via labour supply, the decline of capital costs for firms and effects on EU value chains via lower prices for intermediates. GDP effects depend heavily on the degree of openness with respect to intra-EU trade. We find GDP effects which are in the middle of effects estimated in ex ante studies.
We investigate the evolution of firms’ competitive behavior in the EU by studying the dynamics of firms’ price-cost margins (PCMs) across four countries (France, Italy, Poland and Sweden), in three manufacturing and three services industries for around 170,000 firms over the period 1999–2007. By looking at density distributions of the PCM across firms, we detect an aggregation problem affecting country specific measures of PCM levels, with PCM changes providing instead an unbiased representation of industry dynamics. A Laspeyres-type decomposition of PCM changes shows pro-competitive effects over the period, induced mainly by the reallocation channel, and a tendency to a quality upgrading of firms, revealed by the positive interaction term. These trends are stronger after 2002. We also observe a trend towards lower PCMs across manufacturing industries, while the latter is not true for services. These findings are confirmed by a dynamic panel econometric exercise performed on the pooled firm-level sample.
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This paper analyses the evolution of mark-up levels in the European Union (EU) manufacturing industry over the period 1987-2000 and links this evolution with price and cost developments. It provides an assessment of the impact of the completion of the Single Market Programme (SMP) on the productive efficiency and the market power of manufacturing firms and on prices of manufactured products. Results suggest that in the period prior to the completion of the SMP at the end of 1992, mark-ups of EU manufacturing firms deteriorated in line with a fall in prices, but that mark-ups recovered thereafter thanks to the realisation of productive efficiency gains. For society as a whole, there are welfare gains associated with the SMP, insofar as profit margins recovered after the initial shock delivered by the implementation of the SMP, while prices in real terms declined.
Book
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Over the past decade European economic integration has seen considerable institutional success, but the economic performance of the EU has been varied. While macroeconomic stability has improved and an emphasis on cohesion preserved, the EU economic system has not delivered satisfactory growth performance. This book is the report of a high-level group commissioned by the President of the European Commission to review the EU economic system and propose a blueprint for an economic system capable of delivering faster growth along with stability and cohesion. It assesses the EU s economic performance, examines the challenges facing the EU in the coming years, and presents a series of recommendations. The report views Europe's unsatisfactory growth performance during the last decades as a symptom of its failure to transform into an innovation-based economy. It has now become clear that the context in which economic policies have been developed has changed fundamentally over the past thirty years. A system built around the assimilation of existing technologies, mass production generating economics of scale, and an industrial structure dominated by large firms with stable markets and long term employment patterns no longer delivers in the world of today, characterized by economic globalization and strong external competition. What is needed now is more opportunity for new entrants, greater mobility of employees within and across firms, more retraining, greater reliance on market financing, and higher investment in both R&D and higher education. This requires a massive and urgent change in economic policies in Europe.
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This paper provides estimates of mark-ups of product prices over marginal costs for 36 manufacturing industries in 14 OECD countries over the 1970- 1992 period. The estimates are based on the methodology put forward by Roeger (1995), extended to include intermediate inputs. After a discussion of analytical and data issues, the estimates are presented and shown to be smaller than those of previous studies. It is also shown that the level and dispersion of mark-ups are consistent with a priori views about characteristics of the market structure prevailing in each industry. Finally, the paper examines how mark-up estimates affect the estimated rate of growth of total factor productivity (TFP) ... Cette étude fournit des estimations sur le taux de marge des prix sur les coûts marginaux pour 36 industries manufacturières et 14 pays de l’OCDE pour la période 1970-1992. Les estimations utilisent l’approche mise au point par Roeger (1995) améliorée pour tenir compte des biens intermédiaires. L’étude commence par une discussion des problèmes méthodologiques et statistiques, et les estimations sont présentées. Dans l’ensemble, les taux de marge présentés ici sont beaucoup plus bas que ceux calculés dans d’autres études. Le niveau et la dispersion des taux de marge sont relativement cohérents avec l’idée a priori sur les caractéristiques des différentes structures de marché. En dernier lieu, il est examiné comment les estimations du taux de marge affectent la mesure de la productivité totale des facteurs (PTF) ...
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This Paper highlights a problem in using the first-differenced GMM panel data estimator to estimate cross-country growth regressions. When the time series are persistent, the first-differenced GMM estimator can be poorly behaved, since lagged levels of the series provide only weak instruments for subsequent first-differences. Revisiting the work of Caselli, Esquivel and Lefort (1996), we show that this problem may be serious in practice. We suggest using a more efficient GMM estimator that exploits stationarity restrictions and this approach is shown to give more reasonable results than first-differenced GMM in our estimation of an empirical growth model.
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The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Article
As output and employment rise in business cycle booms, the marginal product of labor falls while real wages generally do not. So marginal cost, which equals the wage divided by the marginal product of labor, rises more than do prices. In this paper we examine this business cycle variation in the markup of price over marginal cost. We consider three leading theories of markup determination. The first is that firms are monopolistic competitors and that the elasticities of their demand curves vary over the business cycle. The second is the customer market model of Phelps and Winter (1970) where firms' markups also depend on the desirability of raising current market share in order to increase future sales. The third has markups depend on individual firms' incentives to deviate from an implicit collusive understanding, as in Rotemberg and Saloner (1986). We show that these three theories can be nested in a single specification that makes markups a function of current sales and of the expected present discounted value of future profits. However, the three theories make different predictions about the signs of the parameters relating the markup to its determinants. We thus estimate equations of this sort empirically to gauge the validity of the three models. This estimation is carried out both with aggregate data and with two-digit industry data. The two-digit data also allow us to see how the relationship between the markup and its determinants varies with the concentration of the industry. Finally, we also discuss in detail the causes of markup variation in two highly concentrated industries.
Book
This volume explains recent theoretical developments in the econometric modelling of relationships between different statistical series. The statistical techniques explored analyse relationships between different variables, over time, such as the relationship between variables in a macroeconomy. Examples from Professor Terasvirta's empirical work are given. Professors Granger and Terasvirta are leading exponents of techniques of dynamic, multivariate analysis. They illustrate in this volume exploratory ways of using such techniques to provide models of nonlinear relationships between variables. This is an extension of previous work on linear relationships, and on univariate models. These developments will be of use to econometricians wishing to construct and use models of nonlinear, dynamic, multivariate relationships, such as an investment function, or a production function. Particular attention is paid to the case of a single dependent variable modelled by a few explanatory variables and the lagged dependent variable in nonlinear form. The book concentrates on stochastic series, since the existence of unexpected shocks strongly suggests that economic variables are stochastic. Granger and Terasvirta also discuss the division of these nonlinear relationships into parametric and nonparametric models.
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A model is presented based on recent theories of economic growth that treat commercially oriented innovation efforts as a major engine of technological progress. We study the extent to which a country's total factor productivity depends not only on domestic R&D capital but also on foreign R&D capital. Our estimates indicate that foreign R&D has beneficial effects on domestic productivity, and that these are stronger the more open an economy is to foreign trade. Moreover, the estimated rates of return on R&D are very high, both in terms of domestic output and international spillovers.
Article
This paper provides empirical evidence on the impact the EU Single Market Program has exerted on market power and total factor productivity in a large sample of Italian firms. Both market power and total factor productivity are estimated by applying several extensions of the methodology developed by Hall. Main findings can be summarised as follows. Firstly, for the sample of ‘1992 most sensitive’ firms market power decreases by 50% in the SMP implementation period compared to previous years, whereas no clear pattern emerges for the other sub-samples of firms. Secondly, and less conclusively, only for the sub-sample of ‘1992 most sensitive’ firms a positive transitory shock to productivity growth rates is observed immediately after the announcement of the reform project. Overall, these results are consistent with the long standing view that economic integration reduces firms’ market power and increases productivity via the removal of non-tariff barriers.
Article
This paper re-examines the relationship between the R&D intensity of an industry and its level of concentration, from the perspective of the Bounds approach to market structure. In so doing, it proposes an index which summarises those aspects of technology and tastes that are relevant to the determination of a lower bound to concentration.
Article
A fresh interpretation is provided of the influential finding that the markup of prices over marginal costs is counter-cyclical. Using quarterly US data we argue that the markup is best modelled as a variable that is integrated of order one. A consequence of this finding is that the markup cannot be related in the long run with business cycle variables since these are traditionally thought of as being stationary. A distinction must therefore be made between the long- and the short-run behaviour of the markup. It is shown that the markup is negatively related to inflation in the long-run, while stationary transforms of the markup are counter-cyclical in the short-run.
Article
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
Article
A standard explicit or implicit assumption underlying many parameter constancy tests in linear models is that there is a single structural break in the sample. In this paper that assumption is replaced by a more general one stating that the parameters of the model may change continuously over time. The pattern of change is parameterized giving rise to a set of parameter constancy tests against a parameterized alternative. The power properties of the LM type tests in small samples are compared to those of other tests like the CUSUM and Fluctuation Test by simulation and found very satisfactory. An application is considered.
Article
This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.
Article
An examination of data on output and labor input reveals that some U.S. industries have marginal cost well below price. The conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output. In booms, firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs. This paper documents the disparity between price and marginal cost, where marginal cost is estimated from annual variations in cost. It considers a variety of explanations of the findings that are consistent with competition, but none is found to be completely plausible. Copyright 1988 by University of Chicago Press.
Article
It is well known that, under the assumptions of constant returns to scale, perfect competition, and the absence of factor hoarding, primal and dual productivity measures should be highly correlated. The apparent lack of correlation is usually attributed to fixed factors of production. In this paper, the author proposes an alternative explanation by relaxing the assumption of perfect competition. By controlling for the presence of a markup component, the author demonstrates that both productivity measures are in fact highly correlated for U.S. manufacturing. The analysis also provides an alternative method of estimating a markup of prices over marginal cost. Copyright 1995 by University of Chicago Press.
Article
The relevance of imperfect competition for models of economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization. The authors outline a new methodology for estimating industry markups of price over marginal cost and the influence of market structure on cyclical movements in total factor productivity. Measures of industry concentration, import competition, and unionization are important for explaining markups in some industry groups. Much of the estimated markup of price over marginal cost is accounted for by noncapital fixed costs. Finally, the authors show that their estimated margins fluctuate substantially over the cycle. In particular, markups are countercyclical, especially in concentrated durable-goods industries. Copyright 1988 by MIT Press.
Article
The question I shall address in this pa-per is: Can the slowdown in productivity growth be explained, wholly or in part, by the recent slowdown in the growth of real R&D expenditures? But first we have to review the following questions: I) What is to be explained? Which productivity and what slowdown? 2) What is the mechanism by which R&D could have contributed to this slowdown? 3) What did happen to R&D in the relevant period? Besides traversing this somewhat familiar ground and reviewing some of the recent literature on this topic, I shall also report on some estimates of my own. The direct answer to the opening question is "probably not." But how we get there needs documenting and may prove instructive on its own merits.
Article
This chapter reviews developments to improve on the poor performance of the standard GMM estimator for highly autoregressive panel series. It considers the use of the "system" GMM estimator that relies on relatively mild restrictions on the initial condition process. This system GMM estimator encompasses the GMM estimator based on the non-linear moment conditions available in the dynamic error components model and has substantial asymptotic efficiency gains. Simulations, that include weakly exogenous covariates, find large finite sample biases and very low precision for the standard first differenced estimator. The use of the system GMM estimator not only greatly improves the precision but also greatly reduces the finite sample bias. An application to panel production function data for the US is provided and confirms these theoretical and experimental findings.
Article
This paper studies the effects of changes in the internal market of the European Community in a partial equilibrium model of imperfect competition with economies of scale. The model is numerically calibrated to data on ten industries and the effects of two policy changes are simulated. The first is a reduction in intra-EC trade barriers; the second is the elimination of firms' ability to price discriminate between different national markets. The simple reduction in intra-EC trade barriers generates modest welfare gains, but much more substantial gains are associated with integration of national markets into a single European market.
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this documentation in all reports and publications involving the application of the DPD package.
Areinvestigationofthemarkupandthebusinesscycle © Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007 rHas the EU’s single market programme fostered competition? 517 BlundellInitial conditions and moment restrictions in dynamic panel data models
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Banerjee,A.andRussell,B.(2004).‘Areinvestigationofthemarkupandthebusinesscycle’,Economic Modelling, Vol. 21, pp. 267–284. © Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007 rHas the EU’s single market programme fostered competition? 517 Blundell, R. and Bond, S. (1998). ‘Initial conditions and moment restrictions in dynamic panel data models’, Journal of Econometrics, Vol. 87, pp. 115–143
Econometric Analysis of Panel DataA reinvestigation of the markup and the business cycle
  • B Baltagi
  • Wiley
  • Chichester
  • A Banerjee
  • B And Russell
Baltagi, B. (2001). Econometric Analysis of Panel Data, 2nd edn, Wiley, Chichester. Banerjee, A. and Russell, B. (2004). 'A reinvestigation of the markup and the business cycle', Economic Modelling, Vol. 21, pp. 267–284.
An Agenda for a Growing Europe: The Sapir Report The Impact of the Implementation of the Single Market Programme on Productive Efficiency and on Mark-ups in the European Union Manufacturing Industry, European Economy, European Commission Directorate-General for Economic and Financial Affairs
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Sapir, A., Aghion, P., Bertola, G., Hellwig, M., Pisani-Ferry, J., Rosati, D., Vinals, D. and Wallace, H. (2004). An Agenda for a Growing Europe: The Sapir Report, Oxford University Press, Oxford. Sauner-Leroy, J.-B. (2003). The Impact of the Implementation of the Single Market Programme on Productive Efficiency and on Mark-ups in the European Union Manufacturing Industry, European Economy, European Commission Directorate-General for Economic and Financial Affairs, Economic Papers, No. 192.
Proposal for a Directive of the European Parliament and the Council on Services in the Internal Market
  • Final
  • European
  • Commission
Final, European Commission, Brussels. European Commission (2004). Proposal for a Directive of the European Parliament and the Council on Services in the Internal Market. COM(2004) 2
A Note on the Estimation of Markup Pricing in Manufacturing, Working Paper No. 1998-6, Centre for Non-linear Modelling in Economics
  • S Hylleberg
  • R W Jorgensen
Hylleberg, S. and Jorgensen, R. W. (1998). A Note on the Estimation of Markup Pricing in Manufacturing, Working Paper No. 1998-6, Centre for Non-linear Modelling in Economics, University of Aarhus, Aarhus, Denmark.
Panel Data Estimation Using DPD for Ox Online Document available under Completing the Internal Market. White paper from the Commission to the Economic Evaluation of the Internal Market Internal Market Scoreboard
  • J A Doornik
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