THE EFFECTS OF PRIVATIZATION AND INTERNATIONAL COMPETITIVE PRESSURE ON FIRMS’ PRICE-COST MARGINS: MICRO EVIDENCE FROM EMERGING ECONOMIES1

Jozef Konings, Patrick Van Cayseele and Frédéric Warzynski

William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This paper uses representative firm level panel data of 1,701 Bulgarian and 2,047 Romanian manufacturing firms to estimate price-cost margins and to analyze how these are affected by privatization and increased competitive pressure. The estimation method used, which is based on Roeger (1995), 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. 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.

Keywords: market power; privatization; firm performance; transition (search for similar items in EconPapers)
JEL-codes: L1 L33 P3 P5 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2003-01-01
New Economics Papers: this item is included in nep-tra
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Citations: View citations in EconPapers (5)

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