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. State-owned enterprises have lower price-cost margins than privatized and foreign owned firms, which suggests that state-owned enterprises price closer to marginal costs and are more concerned with maximizing social welfare (allocative efficiency). An alternative interpretation is that state-owned firms have higher costs than private firms. Foreign-owned firms have the highest price-cost margins. Also privatized domestic-owned firms have higher price-cost margins than state-owned enterprises. 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.