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Heterogeneous effects of product market power on the partial productivity of inputs

Author

Listed:
  • Jacob, Tinu Iype
  • Paul, Sunil

Abstract

This study examines how firms’ product market power affects the partial productivity of key inputs — capital, labour, and raw materials. Using an unbalanced panel of Indian non-financial firms from 1995–2021, the study estimates firm-level markups using a production-function approach and constructs non-parametric Tornqvist indices of factor-specific productivity. System GMM is used to estimate productivity functions, addressing endogeneity. The results reveal a U-shaped relationship between market power and capital productivity and inverted U-shaped relationships for labour and raw material productivity. When market power is low, profit-maximising behaviour enhances flexible-input productivity, while adjustment frictions and excess capacity constrain capital productivity. At higher levels of market power, weakened competitive discipline lowers flexible-input productivity, whereas scale adjustment and improved capacity utilisation increase capital productivity. These findings highlight factor-specific distortions induced by market power with implications for income distribution, employment, and production costs.

Suggested Citation

  • Jacob, Tinu Iype & Paul, Sunil, 2026. "Heterogeneous effects of product market power on the partial productivity of inputs," Economic Analysis and Policy, Elsevier, vol. 90(C), pages 1425-1439.
    • Handle: RePEc:eee:ecanpo:v:90:y:2026:i:c:p:1425-1439
    DOI: 10.1016/j.eap.2026.02.029
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    Keywords

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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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