The apparent increase in market concentration and vertical integration in the Indonesiancrude palm oil (CPO) industry has led to concerns about the presence of market power.For the Indonesian CPO industry, such concerns attract more attention because of theimportance of this sector to the Indonesian economy. CPO is used as the main rawmaterial for cooking oil (which is an essential commodity in Indonesia) and it contributessignificantly to export earnings and employment. However, dominant producers arguethat the increase in economies of scale and scope lead to an increase in the efficiency,which eventually will be beneficial for the end consumers and export earnings. Thisresearch seeks to examine whether the dominant producers do behave competitively andpass the efficiency gains to the end consumers, or they enhance inefficiency throughmarket power instead.In order to identify the most suitable model to measure market power in the IndonesianCPO industry, different market power models are explored. These models can be dividedinto static and dynamic models. In general, all of them accept the price–cost margins as ameasure of market power. However, static models fail to reveal the dynamic behaviourthat determines market power; hence the dynamic models are likely to be moreappropriate to modelling market power. Among these dynamic models, the adjustmentmodel with a linear quadratic specification is considered to be a more appropriate modelto measure market power in the Indonesian CPO industry.In the Indonesian CPO industry, producers can be divided into three groups, namely thepublic estates, private companies and smallholders. However, based on their ability toinfluence market price, smallholders are not considered as one of the dominant groups.By using the adjustment cost model, the market power of the dominant groups isestimated. The model is estimated using a Bayesian technique annual data spanning1968–2003. The public estates and private companies are assumed to engage in a noncooperativegame. They are assumed to use Markovian strategies, which permit firms torespond to changes in the state vector. In this case, the vector comprises the firms and their rivals’ previous action, implying that firms respond to changes in their rivals’previous action.The key contribution of this thesis is the relaxation of the symmetry assumption in theestimation process. Although the existence of an asymmetric condition often complicatesthe estimation process, the different characteristics of the public estates and privatecompanies lead to a need for relaxing such an assumption. In addition, the adjustmentsystem—which can be seen as a type of reaction function—is not restricted to havedownward slopes. Negative reaction functions are commonly assumed for a quantitysetting game. However, the reverse may occur in particular circumstances. Without suchrestrictions, the analysis could reveal the type of interaction between the public estatesand private companies. In addition, it provides insights into empirical examples ofconditions that might lead to the positive reaction function. Furthermore, the analysisadds to the understanding of the impact of positive reaction functions to avoid thecomplicated estimation of the asymmetric case.As expected, the public estates act as the leader, while the private companies are thefollower. Interestingly, results indicate that as well as the private companies, publicestates do exert some degree of market power. Moreover, the public estates enjoy evenhigher market power than the private companies, as indicated by market power indices of-0.46 and -0.72, respectively. The exertion of market power by both the public estates andthe private companies cast some doubts about the effectiveness of some current policiesin the Indonesian CPO industry. With market power, the underlying assumption of aperfectly competitive market condition—that serves as the basis for the governmentinterventions—is no longer applicable. Hence, many government interventions areunlikely to have the desired effect.The Indonesian competition law that has been imposed since 1999 might be effective inpreventing firms to sign collusive contracts. In fact, even without such an agreement,firms in the CPO industry are likely to exert some degree of market power. As analternative, eliminating the ‘sources’ of market power might be a better solution. If the public estates have the aim of maximising welfare, privatisation might improve theirefficiency, hence they have ability to suppress the private companies’ market power.However, if in fact, the public estates deliberately reduce output to gain higher profit,privatisation might increase the degree of market power of both groups of companieseven further. In such a condition, addressing the long term barriers of entry stemmingfrom the requirement of high investment might be a better alternative to address the market power problem in the CPO industry.