Conference on ‘Measuring Competition’

1. Conference on ‘Measuring Competition’ Competition in the Netherlands: What should policy know?Harold Creusen, Bert Minne and Henry van der Wiel

2. Content presentation • Introduction and research questions • Description of used competition indicators and data • Main results of research • Policy implications • Concluding remarks and questions

3. Trends to more competition in the Netherlands • International trend towards removing institutional barriers • WTO-agreements and unification of EU-market in 1992 • Technological developments improve transparency (e.g. ICT and internet) • Lowers transport costs induces more competition • Dutch competition policy  several regulatory reforms aiming to strengthen competition • New competition law (1998) • MDW-programs  removing public and private institutional arrangements in specific markets

4. Competition in the Netherlands: 3 research questions • Did competition increase in the 1990s? • Do competition indicators tell the same story? • What can policy learn from it?

5. Competition indicators: 2 traditional concepts • Profit rate: • Monopoly power to set prices above marginal cost • Higher profit rate implies less competition • Concentration index: • Concentration index (i.e. Hirschman Herfindahl-index) based on market shares • Higher concentration index implies less competition

6. New concept: Boone indicator • Firms differ in efficiency in terms of marginal costs (or productivity level) • These cost advantages lead up to higher profits Competition increases Slope = Boone indicator

7. Boone indicator (cont.) • If competition intensifies then the slope (i.e. the Boone indicator) becomes steeper • Efficient firms exploit efficiency advantage more • increases their relative profits (reallocation effect) • reduces profits inefficient firms, least efficient firms exit (selection effect) • The slope can be measured using econometric procedures: • Likewise profit rate, marginal costs are approximated by variable costs • Both scale parameter and firms-specific effect seem to be important

8. Data • Firm-level data based on yearly Census of Statistics Netherlands • Manufacturing: 1978-1999 • Construction: 1982-1999 • Market services: 1987/93 –1999 • Data cleaned for: • Inconsistent firm-level data like huge growth rates • Lacks in dataset • Data set includes more than 130 selected branches at 3-digit level

9. Change competition across branches • Boone indicator: less competition in the majority of Dutch branches in the 1990s More competition Less competition

10. Overall results • Overall results of indicators point toward less fierce competition: • 56% of all branches experienced a decrease in the trend of the Boone indicator • 67% an increase in profit rate • 69% a higher concentration index • However, the results are diffuse • A number of branches faced a small change in competition intensity • According to Boone indicator, competition intensified in most services branches. • Other indicators do not confirm this

11. Less competition: top 15 • Results in line with overall results: • 15 branches with huge decline in competition represent 20 percent of total output • 15 branches with largest increase only 9 percent • Largest drops particularly in manufacturing • Examples are ‘manufacture of motor vehicles’ and ‘manufacture of vegetable and animal oils’ • Few large declines in services are also found for • Renting of machinery and sale of motor vehicles

12. Do the indicators tell the same story (I)? • Coherence between profit rate and Boone indicator in period 1993-1999 • But, in nearly 30 percent of the selected industries differences occur in sign of change competition

13. Do the indicators tell the same story (II)? • Poor coherence between concentration index and Boone indicator over time • They do not match in more than 40% of all cases

14. Indicators often tell different story at lower levels • Indicators point to the same direction in only 42 percent of all observed industries • Indicators coincide more in case of a fall in competition • Better coherence between profit rate and Boone indicator than between concentration index and Boone indicator • since both concepts are based on profits and marginal costs

15. Exploiting information indicators • Profit rate and Boone indicator differ if large gap between efficiency levels exists • Efficient firms can use their cost advantage • Higher profit rate and rise in competition coincide • Empirical evidence partly supports this • Concentration index deviates from Boone indicator if: • A rise in competition is based on more strategic interaction • Comparison may provide information on the reason why competition declined: • Coherence suggests decline in number of firms • Disagreement suggests less aggressive interaction

16. Why did competition weaken? • Less competition seems awkward finding given regulatory reform in the Netherlands. • Are economy-wide effects counteracting regulatory reforms? Open for discussion • E.g., business cycle effects, wage moderation, higher capital intensity and product differentiation • Comparison of indicators suggests that competition could be weakened: • mainly as result of decline in number of firms (in 80 percent of all cases)

17. Policy implications • Scope competition policy is limited • Competition changes can have different sources • Indicators act like thermometers: • Separately, they say nothing about cause and cure of patient • Complete diagnosis based on more (detailed) information is needed • Beware of clash of information • reduction in administrative burden of firms has its costs

18. Concluding remarks • Competition has become less fierce in the majority of Dutch branches in the1990s • Indicators often signal different developments • Causes decline competition unknown, but... • Indicators suggest that competition mainly weakened as a result of a reduction in the number of firms • Counteracting overall causes negligible? • Scope of competition policy is limited

19. Do we have Dutch troubles? • Indicators suggest that competition has become less fierce in the 1990s! • Innovation expenditures are not high • Labour productivity growth is low in international perspective • What’s wrong with patient?

20. Questions to audience • Why did competition intensity decrease in the Netherlands over time? • Where should we focus on in further research?