Analyzing Market Power in the Indonesian Cement Industry
Keywords:
error correction model, non-stationary, integration test, co-integration test, weakly exogenous, separability test, the Indonesian cement industryAbstract
This paper aims to analyze market power in the Indonesian cement industry during the period of 1993-2011. The model used to estimate the degree of market power is Bresnahan-Lau’s model proposed by Bresnahan (1982) and supported by Lau (1982). This model allows the estimation of market power using the demand and supply function although the marginal cost data in an industry is unavailable. This model would be later reformulated into a dynamic model of error correction model (ECM) framework. The ECM framework adopted here is more based on the theoretical framework because this model could address both statistical problems generated by non-stationary in a time series data and incorporates the important dynamic factors such as habit formation from the demand side and adjustment cost for the producers. In addition, the result of the ECM framework also enables us to analyze the degree of competition in the short and long run equilibrium conditions. Separability test of the variables involving the identification of the degree market power as well as preliminary test such as integration test, co-integration test, and weakly exogenous test is also performed in this paper. The result suggests that the Indonesian cement has some market power of oligopolistic competition both in the short run and in the long run.
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