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Determinants of Individual-Firm Markup in Japan: Market Concentration, Market Share, and FTC Regulations

Determinants of Individual-Firm Markup in Japan: Market Concentration, Market Share, and FTC Regulations

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Journal of the Japanese and International Economies 13, 424–450 (1999) Article ID jjie.1999.0430, available online at http://www.idealibrary.com on

Determinants of Individual-Firm Markup in Japan: Market Concentration, Market Share, and FTC Regulations∗
Kenn Ariga
Institute of Economic Research, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan E-mail: ariga@kier.kyoto-u.ac.jp

Yasushi Ohkusa
Institute for Social and Economic Research, Osaka University

and Kiyohiko G. Nishimu
Journal of the Japanese and International Economies 13, 424–450 (1999) Article ID jjie.1999.0430, available online at http://www.idealibrary.com on

Determinants of Individual-Firm Markup in Japan: Market Concentration, Market Share, and FTC Regulations∗
Kenn Ariga
Institute of Economic Research, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan E-mail: ariga@kier.kyoto-u.ac.jp

Yasushi Ohkusa
Institute for Social and Economic Research, Osaka University

and Kiyohiko G. Nishimu

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Journal of the Japanese and International Economies
13
, 424–450 (1999)Article ID jjie.1999.0430, available online at http://www.idealibrary.com on
Determinants of Individual-Firm Markup in Japan: MarketConcentration, Market Share, and FTC Regulations
Kenn Ariga
 Institute of Economic Research, Kyoto University, Yoshida-Honmachi, Sakyo-ku,Kyoto 606-8501, Japan
E-mail: ariga@kier.kyoto-u.ac.jp
Yasushi Ohkusa
 Institute for Social and Economic Research, Osaka University
andKiyohiko G. Nishimura
Faculty of Economics, University of Tokyo
Received February 7, 1999; revised July 13, 1999
Ariga,Kenn,Ohkusa,Yasushi,andNishimura,KiyohikoG.
—DeterminantsofIndividual-Firm Markup in Japan: Market Concentration, Market Share, and FTC RegulationsThispaperestimatesindividualfirmlevelmarkupformorethan400majormanufacturingfirms in Japan. Our estimates suggest the presence of significant market power for most of these firms, due not only to market concentration but also to the firms’ own market shares,as well as advertizing and sales promotion efforts. The paper then goes on to assess system-atically the impact on estimated markups of regulatory measures taken by the Fair TradeCommission (FTC) of the Japanese Government. We find that non-punitive FTC activitiesare directed toward the right targets and are reasonably effective, whereas injunctions, thestrongest measure endowed to the FTC, has essentially no effect on the markups of firmsin our sample.
J. Japan. Int. Econ.
, Dec. 1999,
13
(4), pp. 424–450. Institute of EconomicResearch, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan; In-stitute for Social and Economic Research, Osaka University; and Faculty of Economics,University of Tokyo.
c
1999 Academic Press
 Journal of Economic Literature
Classification Numbers: L13, L41.
An earlier version of the paper was presented at the NBER-CEPR-TCER Conference on Competi-tion Policy, December 18–19, 1998, International House, Tokyo, Japan. We benefited from commentsby Professors Tim Bresnahan and Noriyuki Yanagawa and other participants of the conference. Theresearch reported here is partially supported by a Grant-in-Aid from the Ministry of Education.4240889-1583/99 $30.00
Copyrightc
1999 by Academic PressAll rights of reproduction in any form reserved.
 
INDIVIDUAL
-
FIRM MARKUP IN JAPAN
4251. INTRODUCTIONFor most economists, in and outside of Japan, competition policy in Japan islargely a neglected cousin of Japan’s industrial policy. Although the Japanesegovernment in recent years has made some attempts to place more emphasis onthe enforcement of anti-monopoly laws, the Fair Trade Commission (FTC), anindependent (administrative) body of the government, is tiny, seriously under-manned, reportedly weak in political power, and largely neglected, at least untilquite recently.The lack of resources is not limited to the government. There has been littlesystematic research on the overall competitiveness of Japanese markets that iscomparable and consistent with the research on the United States and Europe.
1
Among other things, in spite of its obvious importance, we know very little aboutthe overall magnitude, cross-section distribution, and temporal variations of pricemarkups in Japan.
2
This paper attempts to fill this gaping hole in empirical studies of Japanesemarkets and, in particular, of the pricing behavior of firms. We employ the estima-tion procedure developed in Nishimura
et al.
(1999) (hereafter NOA)
3
to obtainestimates of individual firm markup over marginal cost
4
for roughly 450 majormanufacturing firms
5
located in 130 four-digit industries.
6
The average estimatedmarkup of these firms is 1.29, and roughly 90% of the sample firms have markupslarger than unity. The markups are 1.5 or higher at 74 firms. Our estimation resultsthus suggest the significant market power of these firms located in a large varietyof manufacturing sectors.After the estimation of individual firm markup, we conduct a series of regres-sion analyses on the determinants of these markups. The paper addresses twomainissuesintheseexercises.Firstofall,giventhelargediversityintheempiricalstudies on the magnitude and consequences of the market power of firms in indus-trialized economies, our study attempts to offer a comprehensive assessment of the magnitude and major sources of the market power of Japanese firms. Another
1
Bresnahan (1989) surveys major empirical studies in this field.
2
Odagiri and Yamashita (1987), Baba (1995), and our own previous paper (see below) are the fewstudies that estimate markups (price–cost margins) in Japanese industries.
3
This paper differs from NOA in three respects. First, the other paper tries to get a general pictureof Japanese firms and estimates the markup over marginal cost of 1643 firms, including construction,wholesale,retail,andlandtransportation,firms,whilethispaperisconcernedwithonlymanufacturing.Second, NOA uses the value-added production function framework, while this paper utilizes the grossproduction function incorporating material inputs. Third, this paper analyzes the determinants of themarkup,whiletheotherexamineswhetherthestandardconceptofanindustryisstatisticallymeaningfulby testing the homogeneity of coefficients within the industry.
4
Ourestimatesincludeintermediate,material,aswellasfactor,inputssothattheestimatedmarkupsare the ratios of prices over marginal costs inclusive of these inputs.
5
As we see below, most of the firms produce a variety of products across these industries and theyare located in more than one industry.
6
The JSIC lists roughly 550 four-digit manufacturing industries.
 
426
ARIGA
,
OHKUSA
,
AND NISHIMURA
importantissuethatweaddressistheroleofcompetitionpolicyinJapan.Wefocuson econometric investigation of various regulatory and punitive measures takenby the Fair Trade Commission of Japan (
Kousei Torihiki Iinkai
).This paper addresses these issues by estimating individual firms’ average of product-specific markups over marginal cost for different products. The uniquestructure of the data and the estimate of markup for individual firms enable us toaddress issues that cannot be analyzed easily in cross-sectional studies based uponindustry-level data. Our estimation of markup developed in NOA also providessimultaneously the estimate for the magnitude of the fixed cost and the effect of adjustment costs due to the firm’s growth. Using these estimates, we also obtainthe local curvature of a U-shaped marginal cost curve and are able to examine thetechnological properties of various industries.The data on individual markets are also unique. Our data include informationon sales (production) shares of major producers for more than 800 industrial prod-ucts. This data set can be used to calculate concentration and own-market-sharemeasures,andtheycanbeutilizedinanalyzingthepasthistoryofanti-competitiveconduct and disciplinary actions documented and enforced by the FTC.The paper is organized as follows. In the next section, we briefly review theunderlying theoretical model developed in NOA for the estimation of individualfirm markup. Section 3 then extends the model to address the issues of our interestin this paper. Section 4 reports major estimation results and investigates the effectof the FTC’s activities on markups. Concluding remarks are given in Section 5.2. A MODEL OF A MULTI-PRODUCT FIRMIn this section, we derive the basic relation that can be utilized in the empiricalanalysisofmarkupovermarginalcost.Thisistherelationshipamongtheelasticityofoutputtoinputs,themarkuprateovermarginalcost,andfactorshares.Usingthisrelationship, we can identify the markup rate from factor and other inputs sharesand information about production technology, without knowing a firm’s input andoutput prices, its demand conditions, or the strategic interaction among firms.In estimating markup, we utilize a method developed in NOA. In that paper,we derived a fundamental relationship between factor shares, a markup, and tech-nological parameters determining output elasticity, and we estimated a markuputilizing this relationship. We assumed a value-added production function and ig-nored multiplicity of products. In this section, we extend this method and apply itto the case of a gross production function with material inputs and multiple prod-ucts.Weproceedinthreesteps.Inthefollowing,weutilizethefollowingidentifierconventions:
i
firm
product
period
.

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