Abstract
The article uses the elasticity of profits to marginal costs, as in Boone (Econ J 111:1245–1261, 2008b), to measure the degree of competition in the Portuguese economy in a period characterised by the reallocation of resources towards the non-tradable sector and the accumulation of macroeconomic imbalances. Using firm-level data for the period 2000–2009, we find that there is lower competition intensity in the non-tradable sector. The least competitive markets within this sector lay in professional services, network industries and segments of retail trade. We also find that reductions in competition intensity are relatively widespread in the economy, but in terms of sales, gross value added and employment they are more substantial in the non-tradable sector. Results suggest that some network industries and other services exhibit low and a declining competition intensity in the period under analysis. In addition, the article discusses the coherence of the profit elasticity with classic indicators of market power, such as the Herfindahl–Hirschman index and the price-cost margin, and find that in more than half of the markets there is an agreement in the dynamics of competition intensity.
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Source: OECD
Source: OECD
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Notes
CPB (2000) also tests fixed versus random effects but only using information for the pharmaceutical sector.
Although IES formally began in 2006, it included a report for 2005. For this reason, for the purpose of this article, IES is considered from 2005 onwards.
Rents should be excluded from variable costs, though this was not the case. The reason is that the response rate for this variable is reduced, thus its exclusion from total costs of services could introduce another type of bias.
Data from 2006 onwards correspond to NACE Rev. 2 and are adjusted to NACE Rev. 1.1 to be compatible with the remaining information.
Levels and trends could be jointly estimated following Eq. (2). However, there is a break in the survey in 2005 associated to a change in firm-level coverage. For this reason, levels are estimated relying only on the period 2005–2009, when the universe of firms is observed. To ensure that the coefficients associated to the trend are not affected by this break, we introduce an interaction step-dummy for the period after 2005.
The estimates for the trend profit elasticity in each individual market are presented in the “Appendix”.
In order to take into account the increase in the number of observations in 2005, due to the beginning of IES database, we include an interaction step-dummy is included in this year and found to be statistically significant. The weights for each market refer to 2005–2009 as coverage includes the universe firms, at odds with information collected prior to 2005.
It can be argued that these results are affected by the inclusion of 2009, which is associated to the international economic and financial crisis. However, if we exclude this year from the sample, results do not change for most markets.
The results for both levels and trends for these two indicators are presented in the “Appendix”.
To increase comparability with estimated profit elasticity indicator, the PCM is computed excluding firms that report negative profits.
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Acknowledgements
The authors would like to thank the editor and two anonymous reviewers for their valuable suggestions and comments and Lucena Vieira for excellent computational support. All errors are the sole responsibility of the authors and the opinions expressed do not necessarily coincide with those of Banco de Portugal or the Eurosystem.
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Amador, J., Soares, A.C. Competition in the Portuguese economy: insights from a profit elasticity approach. Empirica 45, 339–365 (2018). https://doi.org/10.1007/s10663-016-9363-1
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DOI: https://doi.org/10.1007/s10663-016-9363-1