Tests of market power in Irish Manufacturing Industries

It’s been a long-standing assumption that Irish manufacturing firms are price takers in their output markets. This assumption has been validated by several aggregate level studies. While a much smaller number of studies have examined this issue at a more disaggregated level, they tend to support this conclusion. All of these studies also assume that firms are price takers in their input markets, or, in other words inputs are perfectly elastically supplied to firms. This assumption, however, has never been formally tested. There is intrinsic interest in the context of competition law in ascertaining evidence of deviations from perfect competition in sales of product and purchases of inputs. Moreover the introduction of minimum wages provides an important additional motivation for the topic of this paper, since it is well known that the introduction of minimum wages or increases in the level of minimum wages can lead to increases in employment over a certain range of wages if the firm possesses market power in its labour market. By using four-digit level Census of Industrial Production (CIP) panel data the paper sets out to test the extent of potential market power in Irish manufacturing industries. The paper employs the ingenious method proposed by Hall and later modified by Roeger in this exercise. While the Hall-Roeger method was originally concerned with imperfect competition in output markets, it can be readily extended to input markets. The empirical results do not indicate much evidence of significant imperfect competition in output markets but the results do point to evidence of market power in certain input markets and in some industrial sectors. The implications of these findings are discussed.