Market structure, price rigidity, and performance in the Indonesian food and beverages industry

Keywords: industrial concentration, price rigidity, technical efficiency, price-cost margin, Structure-Conduct-Performance (SCP), new empirical industrial organization (NEIO), Indonesian food and beverages industry, Data Envelopment Analysis (DEA), system of equations

The Indonesian food and beverages industry contributes significantly to the Indonesian GDP and is an important provider of employment. However, this industry is characterized by high industrial concentration which may affect pricing and performance. The objective of this thesis is to examine market structure, price rigidity, and performance as well as their relationship in the Indonesian food and beverages industry. To investigate the relationship between market structure, price rigidity, and performance, this research uses two main frameworks: Structure-Conduct-Performance (SCP) and new empirical industrial organization (NEIO).

This thesis uses firm-level (establishment) data of 59 subsectors of the food and beverages industry sourced from the manufacturing survey of the Bureau of Central Statistics (BPS) over the period 1995-2006. Econometric methods and Data Envelopment Analysis (DEA) are used to address the overall objective.

Empirical results show that industrial concentration converges to the same value across subsectors in the long run. Seven years after the introduction of the competition law in 1999, industrial concentration and price-cost margin are still high. Industrial concentration has a positive effect on the price-cost margin. Besides stopping the upward trend of the price-cost margin, the introduction of the 1999 competition law reduced the effect of industrial concentration on the price-cost margin. The results also suggest that there is only a one-way relationship between industrial concentration and technical efficiency with industrial concentration affecting technical efficiency negatively. Furthermore, this thesis finds evidence that high industrial concentration increases price flexibility with the speed of price adjustment being higher when costs go up than down in the concentrated subsectors. Finally, the results show that there is a simultaneous relationship between industrial concentration, price rigidity, technical efficiency, and price-cost margin. A bi-directional relationship between industrial concentration and price-cost margin was found.