Market Structure, Property Rights And China's Industrial Market Performance: Theory And Empirical Research

Researchers have found many phenomena which it is hard to explain usingstandard industrial theory in the transition economy study, such as de-centralization, aweaken relationship between concentration and profitability, and positive relationshipbetween concentration and mobility. These industrial phenomena reveal the directapplication’s limitation of the Harvard School SCP paradigm in the developingcountries. On the other hand it also shows the complexity which determines marketperformance of developing countries especially in transition economy. This papertakes China’s industrial sector performance into two dimensional spaces, onecoordinate is market structure, the other is property right structure. From theoreticaland empirical angles, the paper explores factors which determine the performance ofChina’s industrial sector.Chapter2explores the relationship between China’s industrial sectorconcentration and profitability from static efficiency perspective. The study finds theprofitability of high concentration group is significantly higher than that of lowconcentration group in the early stage. With the deepening of market reform thesample linear positive correlation between concentration and profitability does notappear. The difference between them do exists but not statistically significant. Theconclusion suggests the determinants of transitional economy profitability arecomplex phenomenon and influenced by many factors, concentration is just one factor.Interestingly the study finds the average profit margin of higher concentration groupis higher than that of lower concentration group significantly after divided the sampleinto three subgroups according the degree of nationalization which controls theproperty right structure’s influence on industry profitability effectively. The empiricalstudy of firm lever shows multi-lever relations between market share and profitability,many industries exist significant positive relationship and others’ positive relationshipis not obvious even negative relationship. Therefore policy makers can’t put too muchemphasis on firms’ absolute scale role in determining market power. Perhaps in thetraditional industry based on scale economy and scope economy, firms’ scale isrelative to price making directly and market manipulation is always in the hands ofthe incumbent giants. In the era of knowledge economy, the competition of thehigh-tech industries has essential difference with traditional industry. A small firm orpotential entering can subvert the dominant role of the incumbent giants with the change of industry technology paradigm by innovation, market power isn’tproportionate to firms’ market share or scale. The characteristics of knowledgeeconomy put forward challenges to traditional industrial organization policyespecially the structure school “structure manipulation”.Chapter3further discusses the change of concentration and the mobility inChina’s industrial sector which offers a new method to study competition degree fromdynamic perspective. The paper explores market share’s mobility of China’s industrialsector which offers a new industrial organization method to study China’s industrialcompetition degree from dynamic angle. Although concentration degree holdsrelatively stable through period from2004to2008, there is huge mobility under staticconcentration by an empirical study on market share’s mobility. To study the changemode of enterprise’s market share also gets the same conclusion. Further researchfinds there has significant positive correlation between industrial concentration andmobility, so concentration can’t predict mobility. Concentration and mobility arecomplement index each other and not alternative as a proxy of measuring the degreeof competition in the industry. The paper questions the sample “structuremanipulation” policy. Government should pay attention to those highly concentratedindustry, but highly centralized are not the sufficient condition of antitrust, becausehighly centralized may shadow huge mobility.Considering the huge discrepancy between Harvard School and Chicago Schoolabout the explanation of concentration-profitability relationship, Chapter4exploreswhether the positive relationship of China’s industrial concentration and profitabilityreflects scale economy or market power using two ways separately. The method basedon Martin support Chicago School’s efficiency paradigm, the average group laborproductivity has significantly influence on group price-cost-margin. The methodbased on Clarke more proves Harvard School’s collusion paradigm. As to an industrywith positive conjecture variable market concentration has significantly impact onconjecture elasticity or the degree of implicit collusion. It shows as for explaining therelationship between concentration and profitability of China’s industrial sector,efficiency or/and market power are complement each other and not alternative. Thisconclusion also give some advice to the formulation of antitrust law, policy makersshould avoid “one size fits all” sample rule and implement different industrialorganization policy against the characteristics of different industry.The low efficiency of SOEs is generally considered to be congenital defects, therefore scholars take property-reforming as only way for granted to solve the lowefficiency of SOEs. The empirical study in chapter5finds in general SOEs have lowefficiency in comparison with private sectors not only in obscure financialperformance but in relatively slow technical progress rate. After divided SOEs intodifferent groups according to nationalization degree, we are surprised to find theincreasing of competition not only enhances the efficiency of non-public ownershipenterprises also increases SOEs’ efficiency. By the analysis of multi-lever gamemodels between SOEs and private enterprises, we compare the efficiency discrepancybetween all kinds of enterprises and social welfare implications in different context,and proves undue social burden is a critical reason which causes the profitability gapbetween SOEs and private sector. Privatization isn’t sufficient to solve SOEs’ lowefficiency, SOEs’ reform ideas should address how to cultivate them into real marketcompetitive players and how to “deburden” for SOEs. Competition does matter thanproperty as to improve business efficiency. After appropriate assumption marketstructure and property right structure that influence firm’s behavior can be unified to asimple principal-agent model in chapter6. The study shows the managerial slack ofSOEs’ managers are not more than that of private competitors either in competitionmarket or in monopoly market, and once again, proves the importance of cultivatingcompetitive environment.Around “Schumpeter hypothesis” about tradeoff between static efficiency anddynamic efficiency, in chapter7empirical study shows firm scale and R&D inputexist relatively stable positive and “inverted U” correlation. But the relationshipbetween R&D output and firm scale is vague, as shown in the discrepancy betweenthe capital-intensive industries and the labor-intensive industries. By comparison free-entry oligopoly and blocked-entry oligopoly with social optical model, the gamemodel finds industry technological opportunity is a key variable which determinessocially optical industry concentration ratio. The section demonstrates the equilibriumfirm number of free-entry will exceed the social optimum and leads to dynamicwelfare loss. Therefore the formulation and implementation of competition policyshould take industry characteristics into consideration. To the industry with lowtechnological opportunity, the policy should reduce entry standard to improve statisticefficiency without losing too much dynamic efficiency. To the industry with hightechnological opportunity such as high-tech industry, on the contrary, industrial policyshould increase entry standard to improve market concentration and get more dynamic efficiency. Based on the paper’s main conclusions chapter8provides someadvice to China’s future competition policy and M&A guideline, namely, not onlyemphasize economy monopoly but administrative monopoly, look around the worldbased on domestic market, realize the change from the maintenance of competition toencouraging innovation.