M A R K E T STRUCTURE: CONCENTRATION AND IMPORTS
AS D E T E R M I N A N T S O F I N D U S T R Y M A R G I N S
A l e j a n d r o Castañeda
E l C o l e g i o d e México
Sabido
and
CIDE*
David Mulato
Universidad Torcuato
Resumen:
d i Telia
Se analizan los determinantes de los márgenes de precio costo de acuerdo con el enfoque tradicional de organización industrial. Los márgenes
de precio costo se hacen función de los índices de concentración y el
grado de penetración de importaciones.
Los resultados indican que
las importaciones reducen los márgenes de precio-costo de la industria
doméstica. E n el periodo posterior a la liberalización comercial el impacto de la concentración disminuye. Con ajustes por comportamiento
cíclico de los márgenes de precio costo, se muestra que los estudios
de sección cruzada tienden a sesgar las estimaciones. Se distingue entre bienes durables y no-durables y se encuentra que la concentración
afecta el márgen de precio costo de los durables.
Abstract:
The paper analyzes the determinants of price-cost margins following
traditional industrial organization approaches. The price-cost margins
are made function of the concentration index, and the degree of import
penetration. We find that imports act as a market disciplining device
that reduces the price-cost margins of the domestic industry.
After
trade liberalization, the impact of concentration diminishes. Controlling for cyclical behavior of the price-cost margins the paper shows
that cross-section studies tend to bias the estimates. A distinction between durables and non-durables is made, finding strong evidence for
concentration to affect the price-cost margins of durables.
Clasificación J E L : LOO, L l l , L 6 0 .
Palabras
clave:
price-cost
margins,
effects,
márgenes de p r e c i o - c o s t o ,
efectos
cíclicos.
Fecha
de recepción: 22 X I 2004
import
penetration,
concentration,
penetración de i m p o r t a c i o n e s ,
Fecha
cyclical
concentración,
de aceptación: 4 V 2 0 0 6
* Sabbatical, visiting professor at C I D E . [email protected]
177
178
1.
ESTUDIOS ECONÓMICOS
Introduction
I n 1986, the M e x i c a n government i n i t i a t e d a n aggressive l i b e r a l i z a t i o n
process. I n 1985, t h e average tariff was 23.5 percent, a n d 92.2 percent
of n a t i o n a l p r o d u c t i o n was protected by i m p o r t license requirements.
B y t h e e n d of 1987, the average tariff was reduced to 11.8 percent
a n d i m p o r t license requirements covered o n l y 25.4 percent of n a t i o n a l
p r o d u c t i o n w i t h a m a x i m u m rate of 20 percent. T h i s process s h o u l d
have h a d a n i m p a c t o n the c o m p e t i t i v e regime experienced by t h e
M e x i c a n m a n u f a c t u r i n g sector. T h i s paper estimates a m o d e l t h a t
studies the i m p a c t of t r a d e l i b e r a l i z a t i o n a n d the i m p a c t of o t h e r
variables o n price cost m a r g i n s .
1
Before t h e advent of the new e m p i r i c a l i n d u s t r i a l o r g a n i z a t i o n
a p p r o a c h as surveyed i n B r e s n a h a n (1989), e m p i r i c a l i n d u s t r i a l o r g a n i z a t i o n l i t e r a t u r e a p p l i e d most of its resources to l e a r n from i n d u s t r y
b e h a v i o r . A s e m i n a l s t u d y i n this t r a d i t i o n is the one p u b l i s h e d b y
B a i n i n 1951. T h e t y p i c a l s t u d y i n this v e i n of research put a set
of i n d u s t r i e s together for a single p e r i o d of t i m e a n d a n a l y z e d , w i t h
regression techniques, the d e t e r m i n a n t s of p r o f i t a b i l i t y or price m a r gins. Schmalensee argued i n favor of this a p p r o a c h . I n his 1985 p a p e r
he defended the i n d u s t r y as u n i t of a n a l y s i s .
2
A p r o b l e m w i t h cross section studies lies i n t h a t they do not a l l o w
for i n d u s t r y specific characteristics. I n this s t u d y we have assembled
t h e d a t a of 63 industries t h a t runs f r o m 1980-1998.
The pooling
of t i m e series a n d cross sections allows us to s t u d y the d e t e r m i n a n t s
of p r i c e m a r g i n s , w h i l e a l l o w i n g for unobservable i n d i v i d u a l i n d u s t r y
effects, thereby s o l v i n g p o t e n t i a l biases shown i n O L S estimates.
3
I n this paper, we investigate the determinants of i n d u s t r y m a r gins for the M e x i c a n m a n u f a c t u r i n g sector. W e a n a l y z e the i m p a c t
of t r a d e l i b e r a l i z a t i o n o n price cost margins a n d s t u d y the i m p a c t of
the business-cycle o n the d e t e r m i n a n t s of price-cost m a r g i n s . T h i s
last t o p i c is i m p o r t a n t because, as some oligopoly models have p r e d i c t e d ( R o t e m b e r g a n d Saloner, 1986; H a l t i w a n g e r a n d H a r r i n g t o n ,
1991; G r e e n a n d P o r t e r , 1984; a n d A t h e y , B a g w e l l , a n d S a n c h i r i c o ,
2002) price-cost m a r g i n s m a y change across the cycle. R o t e m b e r g
a n d Saloner (1986) a n d H a l t i w a n g e r a n d H a r r i n g t o n (1991) have p r e 1
See Domowitz, Hubbard, and Petersen (1986
a, b) for similar studies in
other countries.
2
McGahan (1999) argues that very recently some others have turned back to
the industry as unit of analysis.
3
See the appendix for details.
D E T E R M I N A N T S O F INDUSTRY MARGINS
179
dieted t h a t concentrated i n d u s t r i e s t e n d to collude less d u r i n g b o o m s
to prevent defections. A t h e y B a g w e l l a n d S a n c h i r i c o (2002) showed
t h a t the p r e d i c t i o n of c o u n t e r c y c l i c a l p r i c i n g m a d e by R o t e m b e r g et
al. is robust to schemes w i t h p r i v a t e cost i n f o r m a t i o n . T h i s c y c l i c a l
v a r i a t i o n m a y also interact w i t h the i m p o r t p e n e t r a t i o n r a t i o a n d the
c a p i t a l o u t p u t r a t i o . W e investigate these possibilities.
T h e use of c o n c e n t r a t i o n as a n e x p l a n a t o r y v a r i a b l e s t a r t e d early
i n the cross section studies (see for e x a m p l e C o l l i n s a n d P r e s t o n ,
1969). It emerges also n a t u r a l l y f r o m one stage non-cooperative q u a n t i t y games. T h e p r e d i c t i o n from these models states t h a t , other t h i n g s
being e q u a l , a higher degree of c o n c e n t r a t i o n i n a n i n d u s t r y s h o u l d
lead to a larger (average) L e r n e r index. It is t h i s p r e d i c t i o n t h a t leads
c o m p e t i t i o n commissions to c a l c u l a t e c o n c e n t r a t i o n i n d e x as a n i n d i c a t i o n of the presence of s u b s t a n t i a l m a r k e t power ( p o d e r s u s t a n c i a l
d e m e r c a d o ) exerted b y a f i r m or b y a whole i n d u s t r y .
I m p o r t s act as a m a r k e t power d i s c i p l i n i n g device. A g a i n , n o n cooperative one stage games c a n be used to analyze the i m p a c t of
i m p o r t s o n t h e L e r n e r i n d e x . T h e results d e p e n d u p o n the assumed
behavior of the i m p o r t i n g sector. If i m p o r t s are i n e l a s t i c a l l y supplied t h e n n o n - c o o p e r a t i v e q u a n t i t y games predict t h a t the L e r n e r
index is affected t h r o u g h a n adjustment of the c o n c e n t r a t i o n index.
If i m p o r t s have some degree of elasticity, a change i n the e l a s t i c i t y
of i m p o r t s u p p l y changes t h e L e r n e r i n d e x of domestic firms. T h i s
a p p r o a c h assumes t h a t the i m p o r t i n g sector behaves c o m p e t i t i v e l y . If
i n f o r m a t i o n is disaggregated enough so t h a t it allows for c a l c u l a t i o n
of the shares of large firms o n i m p o r t s a n d we c a n o b t a i n d a t a o n
stocks, hours for t h i s sector, etc., t h e n we c o u l d , i n p r i n c i p l e , m o d e l
p a r t of t h e i m p o r t i n g sector as oligopolist a n d the other p a r t as c o m p e t i t i v e . However, t h a t i n f o r m a t i o n is not available for this s t u d y a n d
we m o d e l this sector as c o m p e t i t i v e .
T h e m a i n results are as follows. T h e change i n the t r a d e regime
affects t h e i m p a c t of c o n c e n t r a t i o n o n the L e r n e r index. T h e size of
t h e coefficient of the c o n c e n t r a t i o n v a r i a b l e diminishes as we move
f r o m the p r e - l i b e r a l i z a t i o n p e r i o d to the p o s t - l i b e r a l i z a t i o n p e r i o d .
C o m p e t i t i o n f r o m i n t e r n a t i o n a l p r o d u c t s changes the r e s i d u a l dem a n d faced by domestic firms generating a lower price m a r g i n for
a given level of c o n c e n t r a t i o n . T h e signs of the i m p a c t of the v a r i ables are fairly robust towards changes i n the specification of the
equations. A f t e r t h e l i b e r a l i z a t i o n p e r i o d , we find for the whole m a n u f a c t u r i n g sector t h a t c o n c e n t r a t i o n has, i n a b o o m , a lower i m p a c t
o n the price-cost m a r g i n . A p p a r e n t l y , concentrated industries have
less collusive agreements i n b o o m s . T h e r e is a difference i n the i m -
180
ESTUDIOS ECONÓMICOS
pact of e x p l a n a t o r y variables a c c o r d i n g to the t y p e of g o o d ( d u r a b l e
or n o n - d u r a b l e ) .
2.
Methodology
C o n s i d e r a one stage C o u r n o t m o d e l a n d foreign c o m p e t i t i o n f r o m
a b r o a d . W e consider t h e foreign sector as b e h a v i n g c o m p e t i t i v e l y .
A s e x p l a i n e d by T i r o l e (1988), a C o u r n o t oligopolist is a m o n o p o l i s t
over its r e s i d u a l d e m a n d . T h u s it c a n be easily proved t h a t its L e r n e r
i n d e x is e q u a l to the following:
1
P - C '
w i t h P d e n o t i n g price, C' m a r g i n a l cost a n d e f the r e s i d u a l dem a n d elasticity of a C o u r n o t c o m p e t i t o r . If we i n c o r p o r a t e the s u p p l y
of foreign i m p o r t s , t h e n the r e s i d u a l d e m a n d of a n a t i o n a l C o u r n o t
oligopolist is e q u a l to the following:
d
„cd
s
1i = Q i
- q
f
W i t h q f representing the r e s i d u a l d e m a n d that f i r m i faces after
t a k i n g i n t o account the behavior of the (domestic) oligopolies a n d
t h e foreign c o m p e t i t i o n ; q f denotes the r e s i d u a l d e m a n d f i r m i faces
after t a k i n g i n t o account the oligopolistic behavior of the d o m e s t i c
c o m p e t i t o r s ; q ) is the s u p p l y of the foreign firms. D i f f e r e n t i a t i n g
b o t h sides w i t h respect to price, r e a r r a n g i n g , a n d u s i n g the e q u a t i o n
4
cd _
m
£
Si{\-
*
a j
y
we get the f o l l o w i n g expression:
d
*
,
1
=
£
m
S
i
( l - a
f
)
+
s
a
f
ïSiil-af)
e f is t h e r e s i d u a l d e m a n d elasticity t h a t faces the d o m e s t i c oligopolist
firm, e
is the market elasticity of d e m a n d , S i is the share of f i r m
i i n d o m e s t i c p r o d u c t i o n , a is the share of the foreign firms i n t h e
m
f
4
This is a standard residual demand model of a Cournot competitor with
fixed foreign imports.
DETERMINANTS O F INDUSTRY MARGINS
181
domestic m a r k e t , e is the s u p p l y e l a s t i c i t y of i m p o r t s . G i v e n t h a t the
L e r n e r i n d e x of a f i r m is e q u a l to t h e inverse of its r e s i d u a l e l a s t i c i t y
of d e m a n d , the L e r n e r i n d e x of a d o m e s t i c o l i g o p o l y t h a t faces foreign
c o m p e t i t i o n t h r o u g h c o m p e t i t i v e i m p o r t s is given by:
a
f
P
-
C _ Sj(l
P
~ e
m
+
g )
f
ctf£
s
f
A s t h e l i t e r a t u r e t r a d i t i o n a l l y proceeds we c a n weight the L e r n e r
index b y the share of f i r m i , a d d i n g over a l l firms a n d a s s u m i n g l i n earity i n m a r g i n a l cost for each f i r m . W e o b t a i n the f o l l o w i n g :
r
= l r l
H
l
(o)
a s
L is the weighted (by shares) L e r n e r index. If there is no e l a s t i c i t y
of s u p p l y of foreign i m p o r t s , e j = 0, t h e n the f o r m u l a states t h a t the
i m p a c t of i m p o r t s is j u s t a n a d j u s t m e n t of the H e r f i n d a h l i n d e x .
T h e e s t i m a t i n g equations are influenced b y the last e q u a t i o n .
A c c o r d i n g to t h i s , c o n c e n t r a t i o n has a positive i m p a c t o n t h e average L e r n e r index a n d the i m p o r t s to m a r k e t r a t i o affects the average
L e r n e r i n d e x negatively.
T h e paper estimates a m o d e l i n w h i c h the price cost m a r g i n
( P C M = L e r n e r Index) is m a d e a f u n c t i o n of several variables, a m o n g
t h e m , t h e C 4 c o n c e n t r a t i o n i n d e x , t h e i m p o r t p e n e t r a t i o n r a t i o (usua l l y defined as M / V A , i m p o r t s over value added) a n d the c a p i t a l o u t p u t r a t i o . T h e first two variables are suggested by e c o n o m i c p r i n ciples as i l l u s t r a t e d i n e q u a t i o n (0). T h e t h i r d is used to c o n t r o l for
technological heterogeneity a m o n g i n d u s t r i e s . W e also investigate
the c y c l i c a l properties of the m a r k u p . W e use four digit d a t a for the
M e x i c a n m a n u f a c t u r i n g sector o b t a i n e d f r o m the E n c u e s t a i n d u s t r i a l
p u b l i s h e d by INEGI. T h e d a t a runs from 1975 to 1998. W e w i l l be
e s t i m a t i n g regression equations of the following sort:
5
6
We use the four firm concentration ratio as there is no information for the
Herfindahl index. However, there is evidence that both indexes are highly correlated (Nelson, 1963). The four firm concentration ratio corresponds in this case to
the sales of the largest four plants in the industry over total sales of the industry.
The information that Instituto
Nacional
de Estadística Geografía e Informática,
INEGI, gathers is at the plant level, which is the reason for calculating this index.
5
6
We should expect a positive relation between the capital-output ratio and
the markup.
182
ESTUDIOS ECONÓMICOS
P C M
= f{CA,M*,K/Q)
(1)
W h e r e C A corresponds to t h e C A c o n c e n t r a t i o n r a t i o , M * c o r r e sponds t o t h e i m p o r t p e n e t r a t i o n r a t i o a n d K / Q refers to t h e c a p i t a l / o u t p u t r a t i o . T h e i n c l u s i o n of C A corresponds t o t h e i n t u i t i o n
t h a t h i g h l y c o n c e n t r a t e d i n d u s t r i e s m a y have a larger price cost m a r g i n . Besides t h e e x p l a n a t i o n advanced i n e q u a t i o n (0), t r a d i t i o n a l
folk theorems i n the repeated game l i t e r a t u r e c o u l d be consistent w i t h
t h i s p r e d i c t i o n . M * , w h i c h corresponds to t h e i m p o r t p e n e t r a t i o n r a t i o , is u s u a l l y a reflection of t h e degree of p r o t e c t i o n of the economy.
A s i n d i c a t e d i n (0), a r e d u c t i o n o f p r o t e c t i o n i n t h e economy has a n
i m p a c t o n the c o m p e t i t i v e regime o f the i n d u s t r y , c h a n g i n g the L e r n e r
i n d e x of domestic firms s e t ' F i n a l l y , K / Q is t h e degree o f c a p i t a l
i n t e n s i t y i n t h e i n d u s t r y . W e s h o u l d expect t h e price cost m a r g i n t o
v a r y across industries i n accordance w i t h t h e degree of c a p i t a l i n t e n sity T h e a i m of i n c l u d i n g t h i s v a r i a b l e is t o pick u p t e c h n o l o g i c a l
h e t e r o g e n e i t y . These e x p l a n a t o r y variables are later c o m b i n e d w i t h
c y c l i c a l variables t h a t i n t e r a c t w i t h t h e m to a n a l y z e t h e behavior o f
price cost m a r g i n s . If t h e i n t e r a c t i o n o f t h e c y c l i c a l variables w i t h
our s t a n d a r d variables appears t o be s t a t i s t i c a l l y significant, i t w i l l
i m p l y t h a t cross-section studies do not reflect accurately t h e i m p a c t
of these e x p l a n a t o r y variables o n price cost m a r g i n s . D e p e n d i n g u p o n
the year of c o m p a r i s o n , g o o d o r b a d , we m a y get a different i m p a c t o f
7
8
10
The paper follows the literature assuming that the concentration ratio is not
endogenous. See Domowitz, Hubbard and Petersen (1986 a, b). Furthermore, we
tested for endogeneity of the concentration index and found no evidence of it. T h e
instruments used are lagged values of concentration measures and lagged values
of the capital-output variable. See footnote 10.
7
This variable is measured in several ways by the literature: it could be equal
to the ratio of imports to total sales or to the ratio of imports to value added.
In some cases the variable corresponds to the ratio of the trade balance with
respect to total sales or value added. The import penetration rate is modeled as
exogenous, because hausman tests do not reject the hypothesis of no-endogeneity.
Domowitz, Hubbard, and Petersen (1986 b); and Pugel (1980) report O L S results.
Grether (1996) also reports the O L S results for the Mexican case.
8
9
A change in protection, for example a reduction in quotas, changes the
elasticity of supply of foreign firms.
To test for robustness we estimated the model with the inclusion of a labor
productivity variable. The inclusion of this variable did not change most of the
results of the paper. We decided to exclude the variable given that there is no a
priori theoretical justification to include it.
1 0
D E T E R M I N A N T S O F INDUSTRY MARGINS
183
the four f i r m c o n c e n t r a t i o n r a t i o , the c a p i t a l i n t e n s i t y v a r i a b l e a n d the
i m p o r t - p e n e t r a t i o n r a t i o o n price cost m a r g i n . T h e sole use of cross
section studies m a y give us a b a d measurement of i n d u s t r y variables
o n price setting behavior. T h u s , to account for c y c l i c a l interactions
we estimate the f o l l o w i n g s y s t e m :
= /(C4, M / T S , K / Q , C A * D , M / T S * D , K / Q * D )
P C M
(2)
w i t h D reflecting t h e c y c l i c a l v a r i a b l e .
T h e P C M v a r i a b l e was c a l c u l a t e d , u s i n g s t a n d a r d formulas
P C M
=
T
O
T
A
L
S A L E S - W A G E S - I N T E R M E D I A T E INPUTS
(3)
T h e r e are several arguments t h a t h i g h l i g h t t h e biases inherent i n
these measurements; however we are m o s t l y interested i n v i e w i n g the
v a r i a b i l i t y of these m a r g i n s across t i m e , rather t h a n their v a r i a b i l i t y
across i n d u s t r i e s .
R e g a r d i n g the c o n c e n t r a t i o n index, we o n l y have observations
for the f o l l o w i n g years: 1970, 1975, 1980, 1985, 1988, 1993, a n d 1999.
For the r e m a i n i n g years we used i n t e r p o l a t i o n techniques, basically
p o l y n o m i a l i n t e r p o l a t i o n (splines) to get the other observations. W e
use the four f i r m c o n c e n t r a t i o n r a t i o as it is the o n l y index a v a i l a b l e .
W e r u n regressions for t h e w h o l e m a n u f a c t u r i n g sectors for the
durables i n d u s t r i e s pooled together a n d for n o n - d u r a b l e s ; a l l regressions are r u n w i t h fixed effects.
11
12
3.
Results
In table 1 we show the c o n c e n t r a t i o n index d i v i d e d by q u i n t i l e a n d
the c o r r e s p o n d i n g price cost m a r g i n . T h e c a l c u l a t i o n is m a d e for each
year f r o m 1980-1998. W e have 63 industries i n c l u d e d i n the sample.
See t h e a p p e n d i x for details.
For a l l years, there is a positive c o r r e l a t i o n between the i n d e x of
c o n c e n t r a t i o n a n d the m a r k u p . F o r several years there are cases i n
w h i c h c o n c e n t r a t i o n increases are not a c c o m p a n i e d w i t h c o r r e s p o n d ing increases i n the price cost m a r g i n . A l t h o u g h for some theories,
1 1
The price cost margin is equal to the Lerner index if variable cost is an
appropriate surrogate for marginal costs.
The index is obtained from INEGI, the index is calculated based only upon
domestic sales. Thus it is perfectly consistent with the theoretical model developed above in which the foreign sector is modeled as perfectly competitive.
1 2
ESTUDIOS ECONÓMICOS
184
o
o
1
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VI
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00
o
00
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VI
w
I
e5
o
0) s
3 o*
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3
D E T E R M I N A N T S O F INDUSTRY MARGINS
185
there is a c o r r e l a t i o n between the c o n c e n t r a t i o n m a r g i n a n d i n d u s t r y
p r o f i t a b i l i t y , there are some other variables t h a t affect this l a t t e r
v a r i a b l e . Besides, the p o t e n t i a l i m p a c t of c o n c e n t r a t i o n , price cost
m a r g i n s s h o u l d d e p e n d o n other variables such as the openness of t h e
i n d u s t r y a n d the i m p a c t of c a p i t a l intensity. W h e n c o n s i d e r i n g a l l
these p o t e n t i a l effects we w i l l see later i n t h e regression results t h a t
c o n c e n t r a t i o n does affect t h e m a r k u p positively.
Before going i n t o the results we present i n g r a p h 1 the measure
of price c o s t - m a r g i n o b t a i n e d f r o m the d a t a for the whole m a n u f a c t u r i n g sector by using the f o r m u l a stated i n e q u a t i o n (3), a n d the
same measurement w i t h t h e use of the H a l l a p p r o a c h (1988) to the
e s t i m a t i o n of p r i c e - m a r k u p s . Briefly, t h e H a l l a p p r o a c h suggests the
i m p l e m e n t a t i o n of i n s t r u m e n t a l variables i n t o Solow e q u a t i o n (Solow,
1957). T h e rate of g r o w t h of the l a b o r - c a p i t a l r a t i o is p r o j e c t e d o n
t h e space spanned b y p r o - c y c l i c a l i n s t r u m e n t s . T h e i d e n t i f i c a t i o n ass u m p t i o n states t h a t the Solow r e s i d u a l i n levels follows a r a n d o m
w a l k w i t h drift. B y p r o j e c t i n g the rate of g r o w t h of the l a b o r - c a p i t a l
r a t i o i n the space s p a n n e d b y the i n s t r u m e n t s , H a l l finds the estim a t e d coefficient (the level of market power) t h a t makes the Solow
residual o r t h o g o n a l to business cycle f l u c t u a t i o n s . However, due to
the c r i t i c i s m s of N e l s o n a n d S t a r z (1988), t h e l i t e r a t u r e has also m a d e
use of estimates w i t h t r a d i t i o n a l OLS techniques. G r a p h 1 was m a d e
b y r u n n i n g H a l l ' s e q u a t i o n w i t h a n OLS technique i n the cross section
of industries i n c l u d e d for this study. So, we have one estimate for the
m a r k u p for each year for t h e whole m a n u f a c t u r i n g sector. T h e P C M
was c a l c u l a t e d as stated i n e q u a t i o n (3) by a d d i n g each i n d i v i d u a l
piece of d a t a needed, across the whole m a n u f a c t u r i n g sector.
13
G r a p h 1 shows a s i m i l a r t r e n d of the P C M c a l c u l a t e d a c c o r d i n g
to H a l l a n d the P C M from e q u a t i o n (3).
3.1. E q u a t i o n 1 R e s u l t s
F i r s t , we e s t i m a t e e q u a t i o n (1) under the a s s u m p t i o n of l i n e a r i t y i n
t h e f u n c t i o n a l f o r m (linear i n parameters). T h e results are shown
for the p e r i o d 1980-1998 a n d t h e n by sub-periods, 1980-1985 a n d
1986-1998. I n t a b l e 2 we show the estimates for e q u a t i o n (1). W e
pooled together a l l industries to o b t a i n a n estimate for the whole
m a n u f a c t u r i n g sector. T o c o n t r o l for i n d u s t r y specific factors, we
1 3
As illustrated in equation (0), under Cournot competition the sum of the
firms profits is proportional to the Herfindahl concentration index.
186
ESTUDIOS ECONÓMICOS
e s t i m a t e a fixed effects m o d e l .
S t a n d a r d errors are i n parenthesis.
I n t h i s t a b l e , the v a r i a b l e M * is defined as the r a t i o of i m p o r t s t o
value a d d e d . A s s h o w n i n t h e table 2, the coefficients o n K / Q a n d
C 4 are h i g h l y significant, a n d the result o n M * also yields a h i g h l y
significant estimate.
1 4
Graph 1
Year
W e c a n see i n the results f r o m table 2 t h a t the r a t i o of i m p o r t s
to value a d d e d becomes significant i n the p e r i o d i n w h i c h M e x i c o
changes its t r a d e regime to i m p l e m e n t a l i b e r a l i z a t i o n process. A s
m e n t i o n e d previously, i n 1985, the average tariff was 23.5 percent a n d
92.2 percent of n a t i o n a l p r o d u c t i o n was protected by i m p o r t license
The fixed effect method allows us to control for industry specific characteristics, thus allowing us to avoid potential biases in the estimation that might
occur if we were to follow a pure OLS approach. Random effects estimates do not
differ substantially in most of the results of this paper. Given that we are more
concerned about the potential omission of industry specific variables, and that
fixed effects are robust to this omission we would rather stay with fixed effects.
1 4
D E T E R M I N A N T S O F INDUSTRY MARGINS
187
requirements. B y t h e e n d of 1987, the average tariff was r e d u c e d to
11.8 percent a n d t h e i m p o r t license requirements covered o n l y 25.4
percent of n a t i o n a l p r o d u c t i o n w i t h a m a x i m u m rate of 20 percent.
T h e sign of the coefficient for the i m p o r t p e n e t r a t i o n r a t i o , M * , is
negative, s h o w i n g t h a t i m p o r t c o m p e t i t i o n d i m i n i s h e s domestic p r i c e m a r g i n s . T h e coefficient o n K / Q is p o s i t i v e for the whole p e r i o d
and for the s u b - p e r i o d 1986-1998. W e s h o u l d expect t h a t c a p i t a l
intensive industries experience larger m a r k u p due to the sunkness of
the investment a n d the need to recover fixed costs. T h e l i t e r a t u r e has
found t h i s coefficient to be p o s i t i v e ( C o l l i n s a n d P r e s t o n , 1969; a n d
D o m o w i t z , H u b b a r d , a n d P e t e r s o n , 1986a).
Table 2
Pooled Regressions - Standard Measure of Import
C4
K/Q
M *
Whole Manufacturing
Penetration
ADJ.R2
Sector
1980-1998
0.07*
(0.03)
0.0037
(0.02)
-0.42*
(0.12)
0.52
1980-1985
0.45*
(0.10)
0.162*
(0.04)
-0.07**
(0.04)
-0.12
0.57
(0.26)
0.072**
(0.04)
-0.543*
(0.14)
1986-1998
M *
0.68
* S i g n i f i c a n t at 5%
* * S i g n i f i c a n t at 1 0 %
is c a l c u l a t e d as the r a t i o of i m p o r t s to value added.
W h e n we pass f r o m the 1980-1985 p e r i o d ( p r e - l i b e r a l i z a t i o n per i o d ) , to t h e p o s t - l i b e r a l i z a t i o n p e r i o d (1986-1998), we see a significant r e d u c t i o n i n the i m p a c t of t h e c o n c e n t r a t i o n i n d e x o n t h e pricecost m a r g i n . A s the economy became more open, the p r o - c o m p e t i t i v e
i m p a c t of i m p o r t s reduced the i m p a c t of c o n c e n t r a t i o n o n price-cost
m a r g i n s . W e s h o u l d expect this behavior from s t a n d a r d o l i g o p o l y
models. A l t h o u g h domestic c o n c e n t r a t i o n persists, the c o m p e t i t i o n
of i m p o r t s makes more elastic the r e s i d u a l d e m a n d faced b y each
f i r m , thereby generating a lower price-cost m a r g i n for a given level of
concentration
1 5
See Geroski and Jacquemin (1981) and equation (0).
188
ESTUDIOS ECONÓMICOS
W e r a n specification tests to test for the endogeneity of M * .
T h e results show t h a t i m p o r t s are not endogenous w h e n we used as
i n s t r u m e n t s two lagged values of the i m p o r t p e n e t r a t i o n r a t e a n d
two lagged observations of t h e c a p i t a l - o u t p u t r a t i o . F o r 1980-1985,
the test does not reject the hypothesis of no endogeneity. A s i m i l a r
o u t c o m e o c c u r r e d f r o m t h e 1986-1998 p e r i o d .
F o r 1986-1998, t h e
test d i d not reject the hypothesis of no e n d o g e n e i t y .
For c o n c e n t r a t i o n we followed a s i m i l a r procedure. T h e tests for
the p e r i o d 1980-1985 a n d t h e p e r i o d 1986-1998 do not reject t h e h y pothesis of no e n d o g e n e i t y .
W e used as i n s t r u m e n t s t h e two lagged
values of c o n c e n t r a t i o n a n d the two lagged values of the c a p i t a l o u t put r a t i o . F o r b o t h M * a n d the c o n c e n t r a t i o n index, the i n s t r u m e n t s
used are w e l l c o r r e l a t e d w i t h the e x p l a n a t o r y variables.
In t a b l e 3 we i n c l u d e a n a l t e r n a t i v e measure of i m p o r t p e n e t r a t i o n : i n s t e a d of l o o k i n g at the r a t i o of i m p o r t s to value-added, we l o o k
at t h e r a t i o of i m p o r t s to t o t a l sales. A s before, we s h o u l d expect t h a t
more open i n d u s t r i e s have reduced price-cost m a r g i n s .
1 6
17
18
Table 3
Pooled Regressions - A n Alternative
Measure ofImport Penetration
M / T S
C4
K/Q
Whole Manufacturing Sector
1980-1998
1980-1985
1986-1998
ADJ.R2
0.06**
(0.03)
-0.039**
(0.02)
-3.49*
(0.09)
0.52
0.42*
-0.089*
(0.03)
-15.7*
(4.64)
0.58
(0.09)
0.158*
(0.04)
0.06
(0.04)
-5.45*
(0.94)
0.69
*Significant at 5%
**Significant at 1 0 %
T h e e x t e r n a l c o m p e t i t i o n v a r i a b l e affects negatively a n d signifi c a n t l y the price-cost m a r g i n s of the m a n u f a c t u r i n g sector for t h e
i b
See the tables in appendix 2.
1 7
Domowitz, Hubbard, and Petersen (1986 b), were aware of potential endo-
geneity of this variable. However, they reported the O L S results.
1 8
See appendix 2 for the results.
D E T E R M I N A N T S O F INDUSTRY MARGINS
189
three periods s t u d i e d , i n c l u d i n g t h e 1980-1985 p e r i o d . T h i s last result is different f r o m the previous table. I n table 3, the C A i n d e x is
significant for a l l periods considered. I n contrast w i t h the previous t a ble, the sign of the coefficient for the c a p i t a l - o u t p u t r a t i o is negative
and significant for the w h o l e p e r i o d , a s u r p r i s i n g result. However,
t h e last p e r i o d (after l i b e r a l i z a t i o n ) shows a p o s i t i v e coefficient for
t h i s v a r i a b l e ( a l t h o u g h non-significant). A s before, the concentrat i o n coefficient is lower for the p o s t - l i b e r a l i z a t i o n p e r i o d , showing the
d i s c i p l i n i n g i m p a c t of i m p o r t s .
3.2. E q u a t i o n 2 R e s u l t s ( C y c l i c a l
Effects)
W e i n c l u d e p r o - c y c l i c a l variables to account for t h e p o s s i b i l i t y of v a r i ations i n the m a r k u p across the business cycle. W e i n c l u d e d the m e a surement of u n e m p l o y m e n t as defined i n INEGI. T h e basic e q u a t i o n to
be e s t i m a t e d is the one defined i n (2) above. T h e v a r i a b l e D i n t h a t
e q u a t i o n is the u n e m p l o y m e n t rate as defined i n INEGI ( U i n table
4). T h e results are reported i n table 4.
Table 4
Pooled Regressions with the I n c l u s i o n
of A n t i - c y c l i c a l Variables ( U n e m p l o y m e n t )
1980-1998
1980-1985
1986-1998
M
-0.385*
0.120
-0.116
0.275
-0.459*
0.144
U M
-0.051*
0.019
-0.052*
0.025
-0.095*
0.032
K
-0.035
0.059
-0.09
0.074
0.004
0.074
U K
0.0058
0.009
0.002
0.011
0.013
0.012
CA
0.045
0.042
0.333*
0.116
0.145*
0.047
UCA
0.0056
0.006
0.019*
0.01
0.007
0.006
ADJ.R2
0.52
0.58
0.68
* S i g n i f i c a n t at 5%
^ S i g n i f i c a n t at 1 0 %
190
ESTUDIOS ECONÓMICOS
T h e i n c l u s i o n of a n t i - c y c l i c a l variables i n the regression does a p pear to have a significant i m p a c t on t h e behavior of the price-cost
m a r g i n s . F o r the p e r i o d 1986-1998, the coefficient o n C 4 s t i l l has a
significant i m p a c t o n the price-cost m a r g i n a n d the a n t i - c y c l i c a l v a r i able U , i n t e r a c t e d w i t h C 4 does not appear s t a t i s t i c a l l y significant.
H o w e v e r , the c y c l i c a l v a r i a b l e does affect the i m p o r t - p e n e t r a t i o n r a t e .
W h e n e v e r there is a recession i n the economy (the u n e m p l o y m e n t
rate is high) the d i s c i p l i n i n g i m p a c t of i m p o r t s is increased. T h u s ,
industries w i t h a great i m p o r t - p e n e t r a t i o n r a t i o experience a stronger
c o m p e t i t i v e i m p a c t f r o m i m p o r t s whenever there is a recession i n t h e
economy. T h i s fact is also observed for the whole p e r i o d (1980-1998).
A s t h e i m p o r t - p e n e t r a t i o n rate increases, the price-cost m a r g i n becomes more p r o - c y c l i c a l . Business cycles appear to affect the i m p a c t
of c o n c e n t r a t i o n for the 1980-1985 p e r i o d . A s the economy went i n t o
a recession, the i m p a c t of c o n c e n t r a t i o n o n the price-cost m a r g i n i n creased. M o r e c o n c e n t r a t e d industries t e n d to have a larger price-cost
m a r g i n i n the d o w n t u r n s . F o r this p e r i o d of t i m e , more c o n c e n t r a t e d
industries lead to m o r e a n t i - c y c l i c a l behavior o n the p a r t of p r i c e cost m a r g i n s . T h i s fact is consistent w i t h the p e r i o d of observation
i n w h i c h the relative closedness of the M e x i c a n economy isolated c o n centrated industries from c o m p e t i t i o n .
T h e i n c l u s i o n of the u n e m p l o y m e n t rate as a single regressor d i d not render a significant
1 9
W e also considered the p o t e n t i a l i m p a c t of business cycles b y
i n c l u d i n g a d u m m y v a r i a b l e t h a t has the value of one whenever t h e
e c o n o m y is g r o w i n g a n d a zero value if the economy is e x p e r i e n c i n g
a recession ( D i n table 5). W e report the results i n table 5.
Table 5
Pooled Regressions with the Inclusion
of Pro-Cyclical Variables ( D u m m y )
M
1980-1998
1980-1985
1986-1998
-0.628*
0.186
-0.119
0.296
-0.95*
0.33
The result that shows that concentration afreets in an anti-cyclical way the
price-cost margins is not robust to a change in the definition of the cyclical variable. In the following table, we will incorporate another measure that gives us
a different prediction. A possible explanation for the divergence in predictions
might come from the fact that the unemployment rate in Mexico is not too responsive to cyclical fluctuations (due to the absence of unemployment insurance).
l y
D E T E R M I N A N T S O F INDUSTRY MARGINS
191
Table 5
(continued)
1980-1998
1980-1985
1986-1998
D M
0.29
0.19
-0.09
0.271
0.46
0.30
K
0.025
0.0298
-0.07
0.05
0.08**
0.04
D K
-0.018
0.025
-0.01
-0.027
0.036
CA
0.086*
0.036
0.028
0.421*
0.104
DCA
-0.019
0.016
0.041*
0.02
-0.076*
0.02
ADJ.R2
0.52
0.57
0.69
*Significant at 5%
0.22*
0.044
* * S i g n i f i c a n t at 10%
A s we observe i n the last table, o n l y the d u m m y t h a t m u l t i p l i e s
the c o n c e n t r a t i o n i n d e x appears significant. T h i s happens o n l y for
the 1980-1985 p e r i o d a n d for the 1986-1998 p e r i o d . F o r the 1980¬
1985 s u b - p e r i o d , we see t h a t as the economy goes into a recession,
t h e i m p a c t of c o n c e n t r a t i o n o n price cost m a r g i n s decreases, w h i l e the
opposite occurs i n a b o o m . F o r the 1986-1998 p e r i o d , the opposite
occurs, as the economy goes into a recession, the i m p a c t of concent r a t i o n o n price cost m a r g i n is increased a n d the i m p a c t is reduced i n
a b o o m . W e notice also t h a t for the 1986-1998 p e r i o d , the coefficient
of M a n d K are significant a n d have the expected signs. However,
there is no apparent significant i m p a c t of the p r o - c y c l i c a l v a r i a b l e for
these variables. B o o m s a n d recessions do not appear to generate a
different i m p a c t f r o m these variables w h e n we measure the change of
regime w i t h t h e d u m m y . T h e change i n the i m p a c t of c o n c e n t r a t i o n
across b o o m s a n d recessions (for the 1986-1998 period) is consistent
w i t h the story a b o u t price wars i n b o o m s a n d collusive agreement i n
recessions (See R o t e m b e r g a n d Saloner, 1986: H a l t i w a n g e r a n d H a r r i n g t o n , 1991; a n d A t h e y , B a g w e l l , a n d S a n c h i r i c o , 20 0 2 ) .
A s the
2 0
Haltiwanger and Harrington modify the Rotemberg and Saloner model to
allow for models in which the current demand generates expectations about future
M
192
ESTUDIOS ECONÓMICOS
e c o n o m y moves i n t o a b o o m , the i m p a c t of c o n c e n t r a t i o n on price-cost
m a r g i n s is d i m i n i s h e d , because firms ( r a t i o n a l l y ) s u s t a i n less c o l l u s i v e
agreements to a v o i d defections a n d the opposite occurs i n a recession.
A c o m p a r i s o n between t a b l e 4 a n d 5 show t h a t , regardless o f
the i n t e r a c t i n g v a r i a b l e , we have almost the same inferences f o u n d
before i n t a b l e 2. T h e signs of the coefficients for M , C 4 a n d K
are s i m i l a r between t h e m a n d w i t h those s h o w n i n t a b l e 2 .
Also,
the significance of t h e i m p a c t of the v a r i a b l e (the coefficient of C 4 ,
K a n d M ) is not affected by the i n c l u s i o n of the a d d i t i o n a l v a r i ables (the i n t e r a c t e d t e r m s , C 4 * U , K * U , U * M i n t h e first regression
and C 4 * D , K * D , M * D i n the second). T h i s is a n i n d i c a t i o n of t h e
robustness of t h e r e s u l t s .
2 1
2 2
T h i s inference related to the i m p a c t of the business cycle e n hances t h e a p p r o a c h used i n this paper. T h e p o o l i n g of cross section
and t i m e series allows us to s t u d y the i m p a c t of the business c y cle o n the e s t i m a t e d coefficients. T h e s i m p l e cross-section a p p r o a c h
c a n n o t account for these v a r i a t i o n s ; t h u s , estimates o b t a i n e d w i t h
cross-section studies - s i m i l a r to those used i n t r a d i t i o n a l i n d u s t r i a l
o r g a n i z a t i o n approaches- w i l l v a r y d e p e n d i n g u p o n o u r year of choice
(good or b a d ) .
2 3
3.3. A n a l y s i s b y Type
o f Good
N e x t , we s t u d y the i m p a c t of these variables by d i v i d i n g by t y p e o f
g o o d - d u r a b l e s a n d n o n - d u r a b l e s - . T a b l e 6 reports the results for
these categories.
The t a b l e shows t h a t c o n c e n t r a t i o n i m p a c t s the price cost m a r gins of d u r a b l e goods for a l l periods considered. F o r n o n - d u r a b l e
goods, t h i s occurs o n l y for t h e 1980-1985 p e r i o d . T h e s e results are
demand. They
sions. However
show that even
counter-cyclical
Rotemberg and
2 1
also find out that collusion is difficult to sustain during expanthey modify slightly the Rotemberg and Saloner conclusion to
during recessions collusion is difficult to sustain. They also find
pricing. Athey, Bagwell, and Sanchirico found similar results to
Saloner in an imperfect information environment.
When we talk about the signs we talk about the value of the coefficients in
a recession and in a b o o m ^ l he value given by the interacting coefficients
change the sign ot the coefficient oi M , K and O 4 when added to them.
Here we refer to robustness with regard to a change in the specification of
^ e q u a t i o n by the addition of cyclical variables.
See Domowitz, Hubbard, and Petersen (1986 a, b).
D E T E R M I N A N T S O F INDUSTRY MARGINS
193
consistent w i t h those f o u n d i n studies of other countries. I n a s t u d y
for t h e US, D o m o w i t z , H u b b a r d , a n d P e t e r s e n (1988) f o u n d also t h a t
c o n c e n t r a t i o n does not a p p e a r t o i m p a c t t h e price cost m a r g i n s of
n o n - d u r a b l e goods. I m p o r t s have a significant i m p a c t for b o t h types
of goods for t h e p e r i o d after t r a d e l i b e r a l i z a t i o n (1986-1998) a n d ,
i n b o t h cases, i m p o r t s reduce t h e price-cost m a r g i n s of d o m e s t i c i n dustries. T h e c a p i t a l - o u t p u t r a t i o affects significantly t h e p r i c e cost
m a r g i n s of n o n - d u r a b l e s for t h e after t r a d e l i b e r a l i z a t i o n p e r i o d . F o r
this p e r i o d a n d for d u r a b l e goods, there is no significant i m p a c t of
the c a p i t a l - o u t p u t r a t i o . However, t h i s v a r i a b l e affects i n a significant m a n n e r a n d negatively, t h e price-cost m a r g i n s of d u r a b l e s for
the whole p e r i o d .
Table 6
P o o l e d R e g r e s s i o n s b y e Type o f G o o d
(Durables and Non-durables)
C4
K / Q
Durables
M *
ADJ.R2
-0.184
0.56
0.118*
(0.04)
-0.096*
(0.04)
(0.156)
1980-1985
0.29*
(0.15)
-0.27*
(0.09)
0.783**
(0.47)
0.52
1986-1998
0.299*
(0.06)
-0.39
(0.3)
-0.46*
(0.173)
0.69
1980-1998
0.04
-0.29
0.44
1980-1998
Non-Durables
1980-1985
1986-1998
M *
(0.05)
0.05
(0.03)
0.55*
(0.14)
-1.1
(1.74)
0.62
(0.05)
0.05
(0.06)
0.09*
(0.04)
-0.49**
(0.28)
0.64
-0.02
(0.31)
*Significant at 5%
* * S i g n i f i c a n t at 1 0 %
is c a l c u l a t e d as t h e r a t i o of i m p o r t s to value added.
T h e v a r i a t i o n of the sign of t h e c a p i t a l - o u t p u t r a t i o i n t h e different regressions a n a l y z e d so far demands a n i n t u i t i v e e x p l a n a t i o n .
O n e p o t e n t i a l e x p l a n a t i o n is related w i t h t h e sunkness of the stocks
194
ESTUDIOS ECONÓMICOS
of c a p i t a l a n d the different periods of crisis a n d expansions observed
t h r o u g h o u t this p e r i o d of analysis coupled w i t h l i b e r a l i z a t i o n . O n e
s h o u l d expect t h a t i n n o r m a l times the c a p i t a l - o u t p u t r a t i o s h o u l d
be p o s i t i v e l y r e l a t e d to price cost m a r g i n s ; however, i n times of recession, t h e c a p i t a l is sometimes s u n k a n d the price cost m a r g i n s m a y
be affected b y other v a r i a b l e s , thus affecting the p o s i t i v e r e l a t i o n between the two. E c o n o m i c t h e o r y suggests t h a t w h e n c a p i t a l is s u n k ,
firms w i l l s t i l l operate even if t h e y cannot recover the s u n k costs. W e
s h o u l d p o i n t out also t h a t , for almost a l l tables s h o w n , this v a r i a b l e
is p o s i t i v e for the after-trade l i b e r a l i z a t i o n p e r i o d .
W e also a n a l y z e t h e p o t e n t i a l c y c l i c a l behavior of the coefficients
for these two types of goods.
Table 7
Pooled Regressions: Non-durable Goods,
Controlling f o r Cyclical Effects
1980-1998
1980-1985
1986-1998
M
-3.34*
1.64
-6.45*
2.93
-3.42*
1.57
D M
3.156**
1.62
6.41*
2.899
3.04*
1.54
K
0.05
0.03
-0.012
0.053
0.08**
0.047
D K
-0.01
0.028
-0.016
0.029
-0.007
0.036
CA
0.086
0.054
0.513*
0.14
0.159*
0.064
DCA
-0.068*
0.028
-0.006
0.034
-0.129*
0.031
ADJ.R2
0.45
0.62
0.65
*Significant at 5%
* * S i g n i f i c a n t at 1 0 %
F o r the case of non-durables, these coefficients are affected b y
business cycles. F o r a l l three periods considered, the d i s c i p l i n i n g i m pact of i m p o r t s is considerably less i m p o r t a n t i n periods of economic
g r o w t h . I n fact, the i m p a c t of i m p o r t s for a l l three periods considered
DETERMINANTS O F INDUSTRY MARGINS
195
vanishes ( s t a t i s t i c a l l y ) i n a b o o m .
A l s o , for these types of goods,
the coefficients of M , CA a n d K for the a f t e r - l i b e r a l i z a t i o n p e r i o d
have t h e expected sign, a n d the coefficient of C A has become significant w h e n we i n c l u d e the c y c l i c a l variables ( D M , D C A a n d D K ) .
T h i s result together w i t h the significance of D M a n d D C , suggests
t h a t the way our e x p l a n a t o r y variables i m p a c t the price cost m a r g i n
of n o n - d u r a b l e s is affected by c y c l i c a l f l u c t u a t i o n s d u r i n g t h i s p e r i o d
(1986-1998). W e also notice, for the a f t e r - l i b e r a l i z a t i o n p e r i o d a n d for
these goods, t h a t t h e i m p a c t of c o n c e n t r a t i o n d i m i n i s h e s as we pass
f r o m a recession to a n e x p a n s i o n . T h i s evidence is consistent w i t h
price w a r s i n b o o m s . D u r i n g expansions, the gains f r o m d e v i a t i n g
are larger; t h u s , c o n c e n t r a t e d i n d u s t r i e s have a lower i m p a c t o n the
level of c o l l u s i o n . F i r m s s u s t a i n a lower level of c o l l u s i o n to prevent
t h e appearance of defectors (see R o t e m b e r g a n d Saloner, 1986, a n d
A t h e y , B a g w e l l , a n d S a n c h i r i c o , 2002, for e n v i r o n m e n t s w i t h i m p e r fect i n f o r m a t i o n ) .
2 4
Table 8
Pooled Regressions: Durable Goods,
Controlling f o r Cyclical Effects
1980-1998
1980-1985
1986-1998
M
0.34
0.348
2.58*
0.72
-0.74*
0.378
D M
-0.54
-1.87*
0.33
0.83
0.31
0.35
K
-0.198*
0.076
-0.61*
0.14
-0.158
0.48
D K
0.075
0.12
0.26
0.30
-0.28
0.45
CA
0.11*
0.049
0.27**
0.147
0.33*
0.06
D C A
0.017
0.02
0.07*
0.027
-0.04
0.56
0.70
ADJ.R2
0.56
*Significant at 5%
0.03
* * S i g n i f i c a n t at 1 0 %
^ We calculated the standard deviation of the sum of the non-interacted coefficient and the interacted coefficient, and in all cases the sum is not significant in
periods of economic growth.
196
ESTUDIOS ECONÓMICOS
F o r the case of durables, we do not see a significant i m p a c t of M
a n d D M for the whole p e r i o d (1980-1998). F o r the after l i b e r a l i z a t i o n
p e r i o d , none of our e x p l a n a t o r y variables appear to be affected b y
business cycles. T h i s result, together w i t h our inference m e n t i o n e d
before w i t h regard to the i m p a c t of the cycle o n n o n - d u r a b l e s , show
t h a t i t was reasonable to split our analysis by these two types of
goods. T h e reader m a y notice t h a t , for the after l i b e r a l i z a t i o n p e r i o d ,
the coefficients of M a n d C A r e m a i n significant after c o n t r o l l i n g for
c y c l i c a l i m p a c t (the i n c l u s i o n of D M , D K a n d D C A ) . A c o m p a r i s o n
between t a b l e 6 a n d 8 w i l l show t h a t , for a l l periods considered, t h e
coefficient of C A r e m a i n s significant as a n e x p l a n a t o r y v a r i a b l e after
c o n t r o l l i n g for p r o - c y c l i c a l behavior.
4. C o n c l u d i n g R e m a r k s
T h i s paper l o o k e d for the d e t e r m i n a n t s of price-cost m a r g i n s . W e
f o u n d evidence t h a t shows t h a t the p r o - c o m p e t i t i v e i m p a c t of i m p o r t s reduces the price-cost m a r g i n s . W e also f o u n d , consistent w i t h
t r a d i t i o n a l models of oligopoly, t h a t the i m p a c t of c o n c e n t r a t i o n o n
price cost-margins is lower as we pass f r o m the stage before the l i b e r a l i z a t i o n process to the stage after the l i b e r a l i z a t i o n process. T h i s
evidence shows how c o m p e t i t i o n f r o m i n t e r n a t i o n a l p r o d u c t s changes
the p r i c e setting b e h a v i o r of domestic firms.
W i t h regard to the i m p a c t of the business cycle o n the behavior of
price-cost m a r g i n s , we f o u n d t h a t , after the l i b e r a l i z a t i o n p e r i o d , t h e
m a r g i n s are more a n t i - c y c l i c a l i n concentrated industries. T h e s t o r y
is consistent w i t h that found i n models of price wars d u r i n g b o o m s
( R o t e m b e r g a n d Saloner, 1986; H a l t i w a n g e r a n d H a r r i n g t o n , 1991;
a n d A t h e y , B a g w e l l , a n d S a n c h i r i c o , 2002). T h e signs a n d significance
of t h e coefficients of our three m a i n e x p l a n a t o r y variables [ C A , K a n d
M ) do not change w i t h the i n t r o d u c t i o n of the c y c l i c a l variables.
S i m i l a r l y to results found i n other countries, we found t h a t c o n c e n t r a t i o n affects t h e price setting behavior of d u r a b l e goods. F o r t h e
case of durables for the p e r i o d 1986-1998, the i n c l u s i o n of p r o - c y c l i c a l
variables does not change our basic inferences. F o r non-durables, a n d
for t h i s p e r i o d , we find inferences changing w i t h the i n c l u s i o n of p r o c y c l i c a l variables. A l s o , for non-durables, the behavior of c o n c e n t r a t i o n after the l i b e r a l i z a t i o n p e r i o d is consistent w i t h the story a b o u t
price wars d u r i n g economic b o o m s .
I n t h e agenda for research we find the p o s s i b i l i t y of e s t i m a t i n g
t h e price-cost m a r g i n w h i l e m e a s u r i n g at the same t i m e the i m p a c t of
D E T E R M I N A N T S OF INDUSTRY MARGINS
197
the v a r i a b l e s s t u d i e d . A possible line of research w o u l d be to e s t i m a t e
the price-cost m a r g i n a l a H a l l (1988) w h i l e a l l o w i n g for t h e same
variables used i n t h i s s t u d y to affect i t ( C 4 , M a n d K ) .
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Appendix 1
The d a t a was o b t a i n e d f r o m t h e E n c u e s t a i n d u s t r i a l a n u a l f r o m 1980
to 1998. T h e d a t a set includes 205 i n d u s t r i a l classes. W e t o o k off
several classes for t h e f o l l o w i n g reasons: W e needed classes t h a t h a d
i n f o r m a t i o n o n c o n c e n t r a t i o n indexes, a n d we chose classes t h a t d i d
not p r o d u c e miscellaneous goods. A l s o , we found t h e d a t a u n r e l i a b l e
for classes 311404, 311501, 311405, 361203, 381404, 381412, 382101,
361201 y 361204. W e kept 63 classes t o r u n the regressions.
The classes are t h e following:
Class E I A
1994
Industrial
Activity
311101
M e a t p a c k i n g , preservation a n d p r e p a r a t i o n
311201
Pasteurization and milk canning
311203
311301
Dry
a n d condensed m i l k
C a n n e d fruits a n d vegetables
312110
M a n u f a c t u r i n g of instant coffe
311701
M a n u f a c t u r i n g of oils, a n d b u t t e r s
312200
M a n u f a c t u r i n g of a n i m a l foods
311304
F i s h a n d shellfish p a c k i n g
311903
M a n u f a c t u r i n g of c h e w i n g g u m
312123
M a n u f a c t u r i n g of starch a n d leaven
313040
M a n u f a c t u r i n g of m a l t
313041
M a n u f a c t u r i n g of beer
314002
M a n u f a c t u r i n g of cigarettes
D E T E R M I N A N T S O F INDUSTRY MARGINS
(continued)
Class E I A
1994
Industrial Activity
Textiles
321202
Y a r n a n d t e x t i l e tissues of soft fibers
(cotton, w o o l a n d s y n t h e t i c fibers)
321205
Y a r n a n d finishing of a r t i f i c i a l fiber
321207
F i n i s h e d of threads
Wood
331102
M a n u f a c t u r i n g of w o o d
Paper
341010
M a n u f a c t u r i n g of p a p e r
341022
M a n u f a c t u r i n g of c a r d b o a r d
341031
P a p e r a n d c a r d b o a r d containers
351300
C e l l u l o s e a n d s y n t h e t i c fibers
Chemical
352100
Pharmaceuticals
352210
V a r n i s h a n d lacquer
352221
Perfumes a n d cosmetics
352222
Soap y detergents
351215
Other chemical
351222
Insecticides
352231
Adhesives
352240
M a n u f a c t u r i n g of other p r o d u c t s of r u b b e r
355001
M a n u f a c t u r i n g of tires
Glass and cement
362011
F l a t glass a n d engraved glass
362013
G l a s s fiber a n d mosaics
362021
G l a s s containers a n d glass vials
362022
M a n u f a c t u r i n g of other glass p r o d u c t s
369111
M a n u f a c t u r i n g of h y d r a u l i c cement
Another Mineral Products
361203
M a n u f a c t u r i n g of bricks a n d
non-refractory bricks
371001
M a n u f a c t u r i n g of i r o n a n d steel
371006
M a n u f a c t u r i n g of i r o n pipes a n d posts
Basic
Metal
199
200
ESTUDIOS ECONÓMICOS
(continued)
Class E I A
Industrial Activity
1994
372003
M e l t i n g of copper
372005
M e l t i n g of a l u m i n u m
Metal
381300
Products
M a n u f a c t u r i n g of m e t a l f u r n i t u r e
381401
M a n u f a c t u r i n g of tools
381404
M a n u f a c t u r i n g of m e t a l wires
381407
M a n u f a c t u r i n g of i r o n containers
Machinery
and
Equipment
382101
M a n u f a c t u r i n g a n d assembly of
a g r i c u l t u r a l machines
382202
T o w i n g a n d crane m a c h i n e r y
382205
F i r e extinguishers
382206
M a n u f a c t u r i n g of electrical
e q u i p m e n t a n d parts
382301
M a n u f a c t u r i n g a n d assemble
of machines for offices
383107
M a n u f a c t u r i n g of batteries
383109
M a n u f a c t u r i n g of another
383110
M a n u f a c t u r i n g of light bulbs
electrical accessories
383201
M a n u f a c t u r i n g of L P s a n d R a d i o s
383202
M a n u f a c t u r i n g of other equipment
a n d electrical equipment
383205
M a n u f a c t u r i n g of records a n d tapes
Transport
Equipment
384110
M a n u f a c t u r i n g a n d assembly of automobiles
384121
M a n u f a c t u r i n g of chassis for a u t o vehicles
384122
M a n u f a c t u r i n g of engines for automobiles
384123
M a n u f a c t u r i n g of vehicle t r a n s m i s s i o n s
384124
M a n u f a c t u r i n g of parts for
the suspension of a u t o m o b i l e vehicles
384125
M a n u f a c t u r i n g of parts for the
b r a k i n g systems of automobiles
383103
M a n u f a c t u r i n g of parts for t h e
electrical s y s t e m of a u t o m o b i l e s
D E T E R M I N A N T S O F INDUSTRY MARGINS
201
(continued)
Class E I A
1994
Industrial Activity
Other Manufacture
352233
Industries
Matches
T h e d a t a gives the level of investment at n o m i n a l prices a n d
there is no i n f o r m a t i o n for c a p i t a l assets. T h u s , we c a l c u l a t e d the
c a p i t a l assets b y following the p e r p e t u a l i n v e n t o r y m o d e l . W e follow
the m e t h o d o l o g y suggested i n N a d i r i a n d P r u c h a (1996) t o c a l c u l a t e
t h e i n i t i a l stock of c a p i t a l . I n t h a t paper they define t h e i n i t i a l stock
of c a p i t a l as the level of investment d i v i d e d by the rate of g r o w t h of
the stock of c a p i t a l a n d the average rate of g r o w t h of d e p r e c i a t i o n for
the whole p e r i o d . F r o m t h a t date o n we calculate the stock by using
the investment series at constant prices a n d the d e p r e c i a t i o n series
(also at constant prices).
T o c a l c u l a t e the level of investment at constant prices, we deflated w i t h a n i n d e x o b t a i n e d f r o m the i n p u t - o u t p u t m a t r i x for v a r ious years. F o r each year we looked at the i n p u t - o u t p u t m a t r i x for
t h a t year (or the one for the closest year) a n d we trace, for each
i n d u s t r y , the purchases of durables. W e c a l c u l a t e d the percentage
share for each i n d u s t r y over t h e t o t a l purchases of durables m a d e by
the i n d u s t r y . W i t h this i n f o r m a t i o n we c o n s t r u c t e d a weighted average price i n d e x b y using t h e weights o b t a i n e d f r o m the i n p u t - o u t p u t
m a t r i x , a n d the price indexes o b t a i n e d from the n a t i o n a l accounts
i n f o r m a t i o n . A l l this procedure is done at t h e two digit level (since
the i n p u t - o u t p u t m a t r i x is u s u a l l y c a l c u l a t e d at this level). F o r each
class, we look at the c o r r e s p o n d i n g two digit price i n d e x a n d we deflate the investment series w i t h t h a t index. F o r d e p r e c i a t i o n we use
the same i n d e x to o b t a i n real depreciation.
Wages a n d value added were deflated w i t h the i m p l i c i t price series. F o r i n t e r m e d i a t e i n p u t s , we used a s i m i l a r procedure to t h e one
expressed for investment a n d d e p r e c i a t i o n . T h e o n l y difference was
t h a t we t r a c e d the purchases of non-durables.
202
ESTUDIOS ECONÓMICOS
Appendix 2
Table A . l
E n d o g e n e i t y Test f o r Table 2
Whole M a n u f a c t u r i n g Sector
Chi Square Marginal Significance
Levels
CA
M *
C A and M * Together
1980 - 1998
0.002965
0.676002
0.011241
1980 - 1985
0.716642
0.891263
0.929889
1986 - 1998
0.16893
0.421369
0.291823
Table A . 2
E n d o g e n e i t y Test f o r Table 3
Whole M a n u f a c t u r i n g Sector
Chi Square M a r g i n a l Significance
Levels
CA and M / T S
CA
M / T S
0.00362
0.993138
0.014298
1980 - 1985
0.78854
0.834184
0.942965
1986 - 1998
0.230047
0.923594
0.477737
1980 - 1998
Together
T h e i n s t r u m e n t s used for C A are the first two lagged values o f
the CA v a r i a b l e , a n d the first two lagged values of t h e c a p i t a l o u t p u t
r a t i o . F o r M * the i n s t r u m e n t s used are the first two lagged values o f
M * t h e first two lagged values of the c a p i t a l o u t p u t r a t i o . F o r t h e
test of C A a n d M * together we used the first two lagged values of t h e
two variables together w i t h the first two lagged values of the c a p i t a l
o u t p u t ratio. A s i m i l a r reasoning applies to M / T S .