The impact of industrial concentration and markups on price-cost margin and prices in the food industry

Purpose This study assesses firm behavior in the food industry by analyzing the extent and dynamics of industrial concentration, markups and prices. While these issues are relevant globally, the Indonesian context – marked by high agro-industrial heterogeneity, structural dominance in sectors like Crude Palm Oil (CPO) and persistent food price inflation – offers a strategically important setting for examining how market power affects pricing and profitability. To this end, the study investigates the impacts of industrial concentration and markups on profitability (proxied by price-cost margin) and prices (wholesale price index). Design/methodology/approach We employ instrumental variable regression models based on the most recent panel microdata of individual manufacturing firms from 2017 to 2021. Findings Our notable findings show that concentration and markups positively and significantly impact the profitability and prices of food industrial products. Specifically, the impact size of the CPO industry tends to be larger than that of the non-CPO industry. This may confirm that the highly concentrated industry leads to firms exercising their market power to gain high profits. Sales orientation, firm ownership and import dependency are also found to affect the industry’s profitability and prices. Originality/value This study contributes to the existing literature by empirically testing key industrial organization theories within an underexplored yet strategically important emerging market. It thoroughly examines market structure and price determination in the food industry using micro-level data from the Indonesian Manufacturing Survey of Large and Medium-sized Firms (2017–2021). Indonesia offers a distinctive research context as the world’s largest archipelago with substantial structural economic variation and socioeconomic diversity. Methodologically, the study applies an advanced analytical approach to markup estimation following De Loecker and Warzynsky (2012) and employs instrumental variable regression to identify the causal effects of market concentration and market power on industry profitability and price formation. It also provides the most updated insights on competition dynamics across food products during the pre- and post-COVID period. The study further incorporates Indonesia’s idiosyncratic feature – namely, the dominance of CPO industries – allowing for a nuanced analysis of sector-specific structures and pandemic-related shocks. This paper enriches ongoing debates on resilience, market power and food security within large developing countries.