Determinants of Market Power In European Industries

Abstract While the scholarly work on market power at the macroeconomic level has gained momentum during the last decades, there is still little empirical evidence on the heterogeneity of market power across industries as well as on the relation between market power and structural industry characteristics. This study thus explores the influence of market concentration and industry-specific factors on market power, as measured by markups, across nine industries within the European Union. The econometric estimation employs the Group Fixed Effect estimator and is based on a rich panel data set of 21 European countries for the years 1999-2021. To identify both proximate and ultimate drivers of market power, potential determinants include market concentration rates and structural conditions of the industries under consideration. Results reveal a significant correlation between market concentration and firms’ markup, which displays, however, substantial heterogeneity across sectors. The same is true for the relation between markups and investments in technology, research and development, and marketing expenses. Results are robust to the choice of the estimation procedure.