Market structure commonly measured by the number and size distribution of firm, influences its ability to charge price above marginal cost. The two extreme market structures are perfect competition and monopoly, which have theoretically predictable results. In between the two extremes, lies industry that falls into oligopoly and monopolistic competition categories. Firms established in these two markets are considered to have market power, commonly described as the ability price above marginal cost. There are a number of reasons that could lead to this practice, which includes among others, merger activities and the existence of barrier to entry.
This paper estimates the markup of price over marginal cost for 3-digit Malaysian manufacturing industries. The markup ratio of price over marginal cost is an important indicator for assessing the role of market structure in resource allocation and is a good measure of allocative efficiency. The basic idea is, if the price is equal to the marginal cost then there is a perfect competition and constant markup ratio. However, if the price is greater than the marginal cost, the industry is considered as a monopoly or an oligopoly.
There are many ways to investigate market power for a single firm or an industry. The economic analysis of market power in the context of antitrust case offered a great number of approaches, both theoretically and empirically. Market power is the ability of a firm to raise the price of its product above the marginal cost and market share is only one of the various factors relevant to that ability. A dominant firm's market power can be derived as the functional relationship with its own market share, market demand elasticity and fringe supply elasticity. Consequently, a firm's market power which is inferred by its own demand elasticity is affected by the firm's own market share adjusted with the market demand elasticity and the fringe supply elasticity (Landes and Posner, 1981). |
