The Dynamics of Industrial Markups in Two Small Open Economies: Does National Competition Policy Matter ?

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Abstract
In this paper, we estimate markup ratios using firm-level data according to the techniques developed by Hall (1986, 1988) and Domowitz et al. (1988) for the Dutch and Belgian manufacturing industry from 1992 to 1997, to determine whether competition policy affects the pricing behaviour of firms. Competition law was applied less toughly in the Netherlands until January 1998. We find evidence of large markup ratios in the manufacturing industry as a whole and in a lot of 2-digit industries. The markup ratio did not decline in Belgium following the creation of a national competition policy authority. However we show that the markup ratio is higher in the Netherlands than in Belgium in the whole manufacturing industry but also in most smaller subsets. In addition, the import penetration ratio positively influences the markup ratio in the Netherlands, meaning that imports do not discipline the industry. Together these findings support the hypothesis that competition is useful to correct allocative inefficiencies.
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