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.
Outline
•
Introduction
•
Descriptive Analysis
•
Empirical Analysis
•
Conclusions
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Introduction
• 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.
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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
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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.
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Descriptive Analysis
• 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.
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Descriptive Analysis

Return on Assets: RTAS  PLBT
TOAS
*100
Profit and Loss before taxes over total assets (fixed and
current) in %
Herfindahl index of sales concentration:
N
Herf   s 2j where
N
sj  aj / aj
j 1
j 1
, aj…sales of firm j
Higher level  generally assumed to imply less competition
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Descriptive Analysis
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
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Descriptive Analysis
Concentration index
+
A priori unclear (competition likely
to be relatively strong)
Competition ↓
Return on assets
-
0
+
Competition ↑
A priori unclear (competition likely
to be relatively weak)
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Descriptive Analysis
20
D is t r ib u t io n o f HR0e8 t u r n o n A s s e ts a cHr 0o8s s C o u n t r ie s ( 1 9 9 9 -2 0 0 7 )
HR 06
15
H08
HR 09 HH12
H08
• Distribution of RoA fairly
concentrated across
countries
HH12
HH12
HH12
HH12
HR 09
• Estonia and Slovenia may
be seen as exceptions
10
HH06
0
5
• Some sector-specific
outliers
HR 01
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S K
S I
R O
P L
LV
LT
H U
H R
E E
C Z
B G
HR 06
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Descriptive Analysis
D is tr ib u tio 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 )
20
• Variation more
pronounced across
sectors than across
countries
RO
15
HU
RO
• A number of sectors
appear to be outliers
10
EE
SK
RO
PL
5
HU
SI
HU
HU
SK
0
SI
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M 06
M 03
M 01
H R 12
H R 09
H R 07
PL
H R 06
H R 05
H R 03
H R 01
H H 12
H H 09
H H 07
H H 06
H H 05
H H 03
H H 01
H 11
H 08
H 04
SI
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Descriptive Analysis
• Trend increase in returns
on assets over time
(related to catching-up?)
Return on Assets
12.00
10.00
• Strongest increase in
wholesale and retail trade
8.00
6.00
• More moderate rise in
manufacturing
4.00
2.00
0.00
1999
2000
2001
2002
2003
2004
2005
2006
2007
Consumer Services
Wholesale trade
Retail Trade
Manufacturing
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• Consumer services in
between other sectors
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Descriptive Analysis
• Sales concentration on a
downward trend
Herfindahl Index of Concentration (Sales)
0.30
0.25
• Consumer services
characterised by highest
levels and strongest
decline in concentration
0.20
0.15
0.10
0.05
0.00
1999
2000
2001
2002
2003
2004
2005
2006
2007
• Developments in other
sectors much less
pronounced.
Consumer Services
Wholesale trade
Retail Trade
Manufacturing
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Descriptive Analysis
Changes in Key Competition Indicators
Change in Sales Concentration
1.0
HR01
0.8
0.6
HH09
0.4
HH01
HR06
0.2
HH05
HR05
HR12
M06
HR03
HH06
0.0
HH12
M01
M03
HH07
H08
-0.2
HR09
HH03
HR07
-0.4
H11
H04
-0.6
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
Change in Return on Assets
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.
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Descriptive Analysis
Sectors with likely decline in competition
• On sectoral basis no
clear pattern regarding
the changes over time.
Production of chemicals and pharmaceuticals
Health (wholesale)
Clothing and footwear (retail)
Misc goods and services (retail)
• Around half of the
sectors are in the
‘twilight’ quadrants.
Sectors with likely increase in competition
Production of food and beverages
Freight transport
Recreation and culture (retail)
Restaurants and hotels
Communication
• Differences across
sectors more
pronounced than
across countries.
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Empirical Analysis
• 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).
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Empirical Analysis
Sectors where RoA is significant (without controlling for openness)
+
production of textiles
housing, utilities
freight transport
retail of food
furnishing (retail and wholesale)
recreation and culture (wholesale)
textiles&Clothing (retail)
Sectors where RoA is significant (controlling for openness)
+
production of textiles
freight transport
retail of food
furnishing (wholesale)
recreation and culture (wholesale)
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textiles&Clothing (retail and wholesale)
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Empirical Analysis
Production:
Textiles,
clothing,
leather
lagged inflation
output gap
M3
Oil price
Industrial sentiment
industry size
material costs
staff costs
return on assets
constant
No. of obs.
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Housing,
water, gas,
other fuels
Freight
transport
Retail: Food
and nonalcoholic
beverages
Retail:
Wholesale:
Clothing and Furnishing,
footwear
household
equipment,
maintenance
of house
Retail:
Wholesale:
Furnishing, Recreation
household
and culture
equipment,
maintenance
of house
0.922
-0.061
0.035
0.008
0.111
0.987
0.478
-1.158
1.208
-8.962
0.415
0.731
-0.017
0.046
-0.348
-4.937
2.414
3.715
2.282
-8.043
0.042
-0.553
0.062
0.127
-0.073
-0.561
0.242
-0.556
2.891
5.367
0.357
-0.640
0.095
0.183
0.188
-11.146
0.308
8.773
2.081
48.041
0.754
0.113
0.079
0.030
0.224
-3.146
0.229
2.710
-1.939
10.632
1.024
-0.005
0.041
0.061
-0.079
2.746
-0.630
-1.377
0.480
-20.231
1.024
-0.108
0.046
0.046
-0.069
-1.390
-0.074
2.361
1.400
-9.041
0.486
-0.191
0.111
0.004
-0.001
-0.017
0.465
-1.116
1.483
2.221
53
54
60
46
50
59
56
54
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Empirical Analysis
• 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.
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Conclusions
• 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.
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Thank you for your attention!
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Descriptive Analysis
RO
D is t r ib u t io n o f S a le s C o n c e n tr a tio n a c r o s s C o u n t r ie s ( 1 9 9 9 -2 0 0 7 )
0 .4
H08
HH09
H08
PL
H04
0 .2 5
0 .3
HR 05
SI
M
H 00 46
M06
HU
LT
0 .2
HR 01
M01
RO
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M 06
M 03
M 01
HR12
H R 09
H R 07
H R 06
H R 05
H R 01
H R 03
H H 12
H H 09
H H 07
HH05
H H 03
HH01
H 11
H 08
H H 06
RO
RO
H 04
S K
S I
R O
P L
LV
LT
H U
H R
E E
C Z
B G
0 .0
0 .0 0
0 .0 5
0 .1
0 .1 0
0 .1 5
0 .2 0
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 )
H08
H08
0 .3 0
0 .3 5
H08
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Details of sectoral breakdown
Economic
activity
Consumer
services
Wholesale
trade
Retail trade
Manufacturing
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Group
H
Industrial
sector
H04
Description
Including NACE, Revision 2 codes
Housing, water, electricity, gas,
other fuels
Communication
Restaurants and hotels
Wholesale: Food and non-alcoholic
beverages
Wholesale: Clothing and footwear
Wholesale: Furnishing, household
equipment, routine maintenance of
house
Wholesale: Health
Freight transport
Wholesale: Recreation and culture
Wholesale: Miscellaneous goods
and services
Retail: Food and non-alcoholic
beverages
Retail: Clothing and footwear
D, E
H
H
HH
H08
H11
HH01
HH
HH
HH03
HH05
HH
HH
HH
HH
HH06
HH07
HH09
HH12
HR
HR01
HR
HR03
HR
HR05
Retail: Furnishing, household
equipment, routine maintenance of
house
Retail: Health
Passenger transport
Retail: Recreation and culture
Items of 47; 9524; 9529
HR
HR
HR
HR06
HR07
HR09
HR
HR12
Retail: Miscellaneous goods and
services
Items of 47; 649; 651; 653; 9525;
96 w/o 9601
M
M01
M
M03
M
M06
Production: Food and non-alcoholic 10; 1107
beverages
Production: Textiles, clothing,
13–15
leather
Chemicals, pharmaceuticals,
20–22
rubber and plastics
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4742; 53; 61
I
Items of 46
Items of 46
Items of 46
4646
Items of 45, 49–51
Items of 46
Items of 46
Items of 47
Items of 47; 9523; 9601
4773–4774; 86
Items of 45, 49–51
Items of 47; 75; 79; R; 951; 9521
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