Competition and Inflation in CESEE: A Sectoral Analysis * Reiner Martin (ECB) Julia Wörz (OeNB)

Competition and Inflation in CESEE: A Sectoral Analysis*

Reiner Martin (ECB)Julia Wörz (OeNB)

Dubrovnik, June 2011

*All views expressed are those of the author and do not necessarily represent the opinions of, and should not be attributed to, the European Central Bank or Oesterreichische Nationalbank.

www.oenb.at [email protected] 2 -

• Introduction

• Descriptive Analysis

• Empirical Analysis

• Conclusions

Outline


• Focus of existing work on competition in CESEE tends to be on competition policy (often with a legal focus)…

• …or on the link between competition and (sectoral or economy-wide) growth.

• There are only few studies looking at(1) country- / sector-specific differences in competition

and(2) the impact of competition on inflation.

• There is no cross-country study looking at the link between competition and inflation in CESEE countries.

Introduction


• Analysis of competition based on firm-level Amadeus database

• Database has obvious caveats (but robustness checks with employment data suggest reasonably good coverage in most countries / sectors).

• Data covers the period 1999 – 2007 (excluding the crisis period)

• Choice of countries and sectors determined by data availability and comparability with HICP components

Introduction


• Study covers the 10 CESEE EU countries and Croatia.

• We look at 20 sectors in 4 groups:

• 3 manufacturing sectors

• 7 wholesale trade sectors

• 7 retail trade sectors

• 3 consumer services

• Some sectors (e.g. textiles, food & beverages) can be followed through the production chain.

Introduction


• Literature suggests various potentially suitable indicators for competition. ‘Profit’ and competition indicators frequently used.

• Choice of indicators in the paper restricted by data availability in Amadeus.• Return on assets (RoA) selected as ‘main’

indicator for empirical analysis. • Sales concentration as additional indicator for

descriptive analysis.

• Recent competition studies prefer profit over concentration measures.

Descriptive Analysis


Return on Assets:

Profit and Loss before taxes over total assets (fixed and current) in %

Herfindahl index of sales concentration:

where , aj…sales of firm j

Higher level generally assumed to imply less competition

N

jjsHerf

1

2

N

jjjj aas

1

/

100*ASOTPLBTSATR



The economic interpretation of indicators can be very difficult!

Return on assets: • A priori: high RoA less intense competition • But: low or negative RoA may indicate predatory behavior of

(some) market participants• ‘Normal’ RoAs depend strongly on industry characteristics

Concentration: • A priori: low sales concentration strong competition• But: aggressive firm behavior may drive out less efficient

firms and increase concentration




A priori unclear (competition likely to be

relatively strong)

Concentration index

Return on assets

Competition ↓

0 +-

-

Competition ↑ A priori unclear (competition likely to be

relatively weak)

+


• Distribution of RoA fairly concentrated across countries

• Estonia and Slovenia may be seen as exceptions

• Some sector-specific outliers


05

10

15

20

D is t r ib u t io n o f R e t u r n o n A s s e ts a c r o s s C o u n t r ie s ( 1 9 9 9 -2 0 0 7 )

BG

CZ

EE

HR

HU LT

LV

PL

RO SI

SK

H 0 8

H R 0 9 H H 1 2

H 0 8

H 0 8

H H 1 2

H H 1 2

H R 0 6

H 0 8

H H 1 2

H R 0 1

H R 0 6

H R 0 9

H H 0 6

H H 1 2


• Variation more pronounced across sectors than across countries

• A number of sectors appear to be outliers


05

10

15

20

D is tr ib u t io n o f R e tu r n o n A s s e ts a c r o s s S e c to r s (1 9 9 9 - 2 0 0 7 )

H04

H0

8

H1

1

HH

01

HH

03

HH

05

HH

06

HH

07

HH

09

HH

12

HR

01

HR

03

HR

05

HR

06

HR

07

HR

09

HR

12

M0

1

M03

M0

6

R O

H U

PL

S I

EE

H U

S K

H U

H U

PL

R O

S I

R O

S I

S K


• Trend increase in returns on assets over time (related to catching-up?)

• Strongest increase in wholesale and retail trade

• More moderate rise in manufacturing

• Consumer services in between other sectors



• Sales concentration on a downward trend

• Consumer services characterised by highest levels and strongest decline in concentration

• Developments in other sectors much less pronounced.




H04

H08

H11

HH01

HH03

HH05

HH06

HH07

HH09

HH12

HR01

HR03HR05

HR06

HR07

HR09

HR12

M01M03

M06

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8Change in Return on Assets

Changes in Key Competition Indicators

Note: Sector-specific deviations from the average change in return on asstes and the concentration index between the periods 1999–2001 and 2005–2007; see table A2 for a description of sector codes used here.

Change in Sales Concentration


• On sectoral basis no clear pattern regarding the changes over time.

• Around half of the sectors are in the ‘twilight’ quadrants.

• Differences across sectors more pronounced than across countries.

Descriptive AnalysisSectors with likely decline in competition

Production of chemicals and pharmaceuticalsHealth (wholesale)Clothing and footwear (retail)Misc goods and services (retail)

Sectors with likely increase in competition

Production of food and beveragesFreight transportRecreation and culture (retail)Restaurants and hotelsCommunication


• Intensity of competition is expected to impact price developments over shorter horizons.

• Simple empirical approach to test this hypothesis is including competition variable (RoA) in sectoral inflation estimations.

• Other variables include money growth, output gap, lagged inflation, oil prices and sector-specific cost variables.

• Period and country coverage in line with descriptive analysis above (11 countries, 20 sectors).

Empirical Analysis


Empirical AnalysisSectors where RoA is significant (without controlling for openness)

production of textiles textiles&Clothing (retail)housing, utilitiesfreight transportretail of foodfurnishing (retail and wholesale)recreation and culture (wholesale)

Sectors where RoA is significant (controlling for openness)

production of textiles textiles&Clothing (retail and wholesale)freight transportretail of foodfurnishing (wholesale)recreation and culture (wholesale)

+

+

-

-


Empirical Analysis

Production: Textiles, clothing, leather

Housing, water, gas, other fuels

Freight transport

Retail: Food and non-alcoholic beverages

Retail: Clothing and footwear

Wholesale: Furnishing, household equipment, maintenance of house

Retail: Furnishing, household equipment, maintenance of house

Wholesale: Recreation and culture

lagged inflation 0.922 0.415 0.042 0.357 0.754 1.024 1.024 0.486output gap -0.061 0.731 -0.553 -0.640 0.113 -0.005 -0.108 -0.191M3 0.035 -0.017 0.062 0.095 0.079 0.041 0.046 0.111Oil price 0.008 0.046 0.127 0.183 0.030 0.061 0.046 0.004Industrial sentiment 0.111 -0.348 -0.073 0.188 0.224 -0.079 -0.069 -0.001industry size 0.987 -4.937 -0.561 -11.146 -3.146 2.746 -1.390 -0.017material costs 0.478 2.414 0.242 0.308 0.229 -0.630 -0.074 0.465staff costs -1.158 3.715 -0.556 8.773 2.710 -1.377 2.361 -1.116return on assets 1.208 2.282 2.891 2.081 -1.939 0.480 1.400 1.483constant -8.962 -8.043 5.367 48.041 10.632 -20.231 -9.041 2.221

No. of obs. 53 54 60 46 50 59 56 54


• RoA significant determinant for inflation in 8 (7) out of 20 sectors.

• Except for the retail (and wholesale) part of the textiles & clothing sector the coefficients have the expected sign.

• Significant sectors belong to all sector ‘types’ - but more so wholesale sectors

• The sectors ‘food & beverages retail’ as well as ‘housing & utilities’ warrant particular attention from an inflation perspective.

Empirical Analysis


• Research on the intensity of competition in the CESEE region still rather limited – largely due to lack of data.

• This limits also the scope for analyses of the link between competition and price developments.

• Results suggest, however, that the link matters – notably at a time of resurging inflation in the region.

• Besides refining the approach pursued in this paper, sector-specific studies may be a good way forward.

Conclusions


Thank you for your attention!



0.0

00

.05

0.1

00

.15

0.2

00

.25

0.3

00

.35

D is t r ib u t io n o f S a le s C o n c e n t r a t io n a c r o s s C o u n t r ie s ( 1 9 9 9 - 2 0 0 7 )

BG

CZ

EE

HR

HU LT

LV

PL

RO S

I

SK

H 0 4

H 0 8

M 0 6

H 0 8 H 0 4

H 0 8 H 0 8

H 0 8

H H 0 9

H R 0 5

H R 0 1M 0 1

M 0 6

0.0

0.1

0.2

0.3

0.4

D is tr ib u tio n o f S a le s C o n c e n tr a tio n a c r o s s S e c to r s (1 9 9 9 -2 0 0 7 )

H04

H08

H11

HH

01

HH

03

HH

05

HH

06

HH

07

HH

09

HH

12

HR

01

HR

03

HR

05

HR

06

HR

07

HR

09

HR

12

M01

M0

3

M06

R O

L T

R O

PL

R O

S I

R O

H U


Details of sectoral breakdownEconomic activity

Group Industrial sector

Description Including NACE, Revision 2 codes

H H04 Housing, water, electricity, gas, other fuels

D, E

H H08 Communication 4742; 53; 61H H11 Restaurants and hotels IHH HH01 Wholesale: Food and non-alcoholic

beveragesItems of 46

HH HH03 Wholesale: Clothing and footwear Items of 46HH HH05 Wholesale: Furnishing, household

equipment, routine maintenance of house

Items of 46

HH HH06 Wholesale: Health 4646HH HH07 Freight transport Items of 45, 49–51HH HH09 Wholesale: Recreation and culture Items of 46HH HH12 Wholesale: Miscellaneous goods

and servicesItems of 46

HR HR01 Retail: Food and non-alcoholic beverages

Items of 47

HR HR03 Retail: Clothing and footwear Items of 47; 9523; 9601

HR HR05 Retail: Furnishing, household equipment, routine maintenance of house

Items of 47; 9524; 9529

HR HR06 Retail: Health 4773–4774; 86HR HR07 Passenger transport Items of 45, 49–51HR HR09 Retail: Recreation and culture Items of 47; 75; 79; R; 951; 9521

HR HR12 Retail: Miscellaneous goods and services

Items of 47; 649; 651; 653; 9525; 96 w/o 9601

M M01 Production: Food and non-alcoholic beverages

10; 1107

M M03 Production: Textiles, clothing, leather

13–15

M M06 Chemicals, pharmaceuticals, rubber and plastics

20–22

Consumer services

Wholesale trade

Retail trade

Manufacturing

Documents

Competition and Inflation in CESEE: A Sectoral Analysis * Reiner Martin (ECB) Julia Wörz (OeNB)