This paper uses representative firm level panel data of 1,701 Bulgarian and 2,047 Romanian manufacturing firms to estimate price-cost margins and to analyze how these are affected by privatization and increased competitive pressure. The estimation method used, which is based on Roeger (1995), 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. We find that privatization is associated with higher price-cost margins in both Bulgaria and Romania. Moreover, foreign owned firms have higher markups than domestic privatized firms. Our results suggest that the sequencing of reforms, such as demonopolization prior to privatization and the establishment of competition policy, may be important. 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. Our results can be of relevance for other emerging economies, such as China and Vietnam, which still have to undergo major privatization programs.
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Length: 47 pages Date of creation: 01 Jan 2003 Date of revision: Handle: RePEc:wdi:papers:2003-603
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Find related papers by JEL classification: L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out P3 - Economic Systems - - Socialist Institutions and Their Transitions P5 - Economic Systems - - Comparative Economic Systems
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