Real wages, profit margins and inflation in Turkish manufacturing under post-liberalization

Abstract

This article reports investigations into the behaviour of gross profit margins (mark-ups) in Turkish manufacturing industries for the post-1980 liberalization period in relation to price inflation, trade liberalization (openness) and real wage costs. Panel data econometrics over 29 subsectors of Turkish manufacturing are used over the period 1980–1996. Results suggest that profit margins are positively and significantly related both to price inflation and real wage costs. However, openness is found to have very little impact on profit margins.

Notes

 Concentration ratios measure the share of value added (or sales) of the largest firms. Let s _i be the share of value added of firm i; ranked from highest (1) to lowest (N) CR4 = s ₁ + s ₂ + s ₃ + s ₄ is then the 4-firm concentration ratio. Higher measures of CR4 indicate a more concentrated market. On the other hand, Herfindahl indexes are generally preferred to concentration ratios since they are influenced by the size distribution of firms in a way that simple CRs are not. Let s _i equal firm i's share of industry sales (multiplied by 100 so that 10% is 10, etc.). The Herfindahl index is then the sum of the squared shares:

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 See, for instance, Güneş (1991), Kaytaz, Altın and Güneş (1993) Katırcıoğlu (1990) and Şahinkaya (1993) for the evaluation of market concentration and patterns of oligopolistic mark-up pricing in the industrial commodity markets. Güneş, Köse and Yeldan (1996), in turn, document comprehensive panel data on the degree of concentration in Turkish manufacturing using the standard Input-Output classification for the period 1985–1993. Metin-Ozcan et al. (2002) argue that, contrary to expectations, the opening process was unable to introduce warranted increases in competition in the Turkish industrial commodity markets.

 All these models assume that inflation and the mark-ups are stationary.

 This is the threshold further used by Boratav et al. (2000) and Yeldan and Köse (1999) in their historical account of the Turkish macrodevelopments over the post-liberalization era. There, on a further level of finesse, the sectors, which had CR4 ratios between 30% and 49% are classified as ‘monopolistically competitive’, and those sectors with CR4 ratios exceeding 50% are regarded to be ‘oligopolistic’.

 Given that the idea of ‘seller concentration’ refers to the size distribution of firms that sell a particular product, the concept is usually regarded as a significant dimension of market structure since it is thought to play an important part in determining market power. Some researchers who have been studying market power have sought to measure it by using indexes based on microeconomic theory dating back to Lerner (1934) who suggested that the difference between price and marginal cost divided by price could serve as a direct measure of departures from the competitive ideal. Despite its intuitive appeal, the Lerner index is criticized on the grounds that it is essentially an ex post measure of allocative efficiency. Curry and George (1983) provide a thorough evaluation of these issues.

 For a more detailed information on these and related concepts see SIS Manufacturing Annual Industry Surveys and the SIS web site at http://www.die.gov.tr