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Market Power in Australian Manufacturing Industry: A Confirmation of Hall's Hypothesis

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  • Kaludura Abayasiri-Silva

Abstract

Robert Hall (1986, 1988, and 1990) has emphasised the importance of imperfect competition and economies of scale in explaining procyclical movements in measured total factor productivity in US industries. In contrast to the labour hoarding hypothesis and real business cycle theorists, he cites the observed procyclical movement in total factor productivity in US industries as evidence against perfect competition, revealing that prices substantially exceed marginal costs. Following the work of Hall (1986, 1988 and 1990), his paper investigates whether the procyclical movements in total productivity in Australian manufacturing industries provide some evidence for a particular type of market structure. The main contribution of this paper is the provision of a formal explanation for the difference between the estimated markup ratios and returns to scale by using value added data and gross output data, as highlighted in the work of Domowitz, Hubbard and Peterson (1988), Norrbin (1993) and Basu and Fernald (1995, 1997). Our formal explanation shows that, with the use of value added data, the estimated Solow residual (and hence the markup ratios) are almost twice as large as those obtained with gross output data, because of the two different production functions involved in estimating the Solow residual. Moreover, the main results of the paper, based on the value added data, indicate that the price of most Australian manufacturing industries exceeds their marginal costs, as in the case of the US industries. The highest markup ratios are reported by the chemical and the iron and steel industries. The results also provide evidence that the textile, non-mineral products, other transport and photographic and scientific industries behave as competitive industries.

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Bibliographic Info

Paper provided by Victoria University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number g-132.

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Date of creation: Apr 1999
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Handle: RePEc:cop:wpaper:g-132

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Related research

Keywords: Market structure; total factor productivity; economies of scale; imperfect competition;

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Cited by:
  1. Rezitis, Anthony N., 2010. "Evaluating the state of competition of the Greek banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(1), pages 68-90, February.
  2. Roberto Roson, 2006. "Introducing Imperfect Competition in CGE Models:Technical Aspects and Implications," Working Papers 2006_02, Department of Economics, University of Venice "Ca' Foscari".
  3. Anthony Rezitis & Maria Kalantzi, 2011. "Investigating Market Structure of the Greek Manufacturing Industry: A Hall-Roeger Approach," Atlantic Economic Journal, International Atlantic Economic Society, vol. 39(4), pages 383-400, December.

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