Contestability test for the Romanian market.

Dima, Mihaela Alina ; Sandru, Ioana Maria Diana

1. INTRODUCTION

Competition does not guarantee competitiveness, but open markets do put companies under continual pressure to innovate, improve quality and keep prices low. Individual companies often experience competition as a double-edged sword. Very few modern industries conform to the economist's ideal of an open and free market. Most sectors are dominated by a handful of large players, which employ strategies that deliberately marginalize or weaken their competitors (Bannerman, 2002). Contestability is a concept that relates to the way market performs. It has been suggested that greater contestability of industries should be encouraged, for example through policies aimed at reducing entry barriers (Accut and Elliott, 2001)).

The concept of "optimum competition" for each market is a useful target; but, alone, it would place most or all actual markets in the "suboptimum" category and fail to distinguish between different degrees of deficiency (Sosnick, 1958). The workable competition should be carefully identified according to the stage of market evolution, specific circumstances of the country and according to the market participants' ranking and perceptions.

Certain structure dimension norms are suggested in the literature: (1) A large or an appreciable number of traders, or several at least, none dominant; (2) As many or at least as many as scale economics permit and price-sensitive quality differential; (3) Absence of legal restrictions (4) Firms should strive in rivalry, pursuing their independent judgment and responding without collusion to considerations of profit and loss; (5) Firms should not shield permanently inefficient rivals, suppliers, or customers; (6) There should be no unfair, exclusionary, predatory, or coercive tactics; (7) Profits should be at levels which reward investment and efficiency and induce innovation. (8) Output should be consistent with a good allocation of resources; (9) Entry should be as free as the nature of industry permits.

The lack of competition and its potentially adverse effects on welfare in society are the main and traditional concern of competition policy (Stigler, 1971). The policy should lead to the preservation of sufficient, workable competition: the type of competition that leads to competitive price levels, cost reduction and higher quality products and services (Maks, 1992). Contestable market policy has potentially important implications for the interpretation of market performance and for the design of economic policy (in particular "competition" or "antitrust policy").

2. METHODOLOGY

We used a sample of 425 Romanian companies, whose managers were interviewed on their market practices. The total number of companies acting on the Romanian market, as of 2007, is 318.728, which means that, assuming a normal distribution, our sample size admits an error of less than 5%, which is suitable for the analysis. We considered that only the following sample criteria are relevant for our study: 1). year of company's establishment (variable for evaluating the market experience of the company); 2). main activity sector of the company; 3). total sales of the company (business dimension); 4). number of employees (business dimension); 5). nature of the company's capital (private or public).

The paper's objective is to determine relevant factors for the market contestability applied for the Romanian business environment. The significance of different factors, such as the company's main field of activity, the sales volume, the company's number of employees, and the nature of capital have been tested based on the answers provided by the questionnaire. For testing, regression functions between the above-mentioned factors and the answers provided to specific questions have been used. Multiple-choice questions targeted: the type of barriers on the market, the way of setting up the price on the market, the main objective of the company, the identification of competitors on the market and the perception of the level of competition on the market.

As in table 1, the largest number of respondents (60.28%) think that competitors' behaviour is the most important barrier for their activity on the market, while 19.39 % consider that the production capacity of their competitors is a threat.

For testing the relevance of the four factors, namely a company's main field of activity, its sales volume, its number of employees, and the nature of capital, in connection with the five different aspects mentioned above, the answers provided to the multiple-choice questions have been used as dependent variables. Each ticked answer choice (whether it refers to the four factors or to the five aspects) has been marked by 1, and the ones left unticked by 0.

3. RESULTS

Considering the analysis between the variable "a company's main field of activity" and each of the five aspects one can notice that though weak (multiple r = 0.158), the correlation between this factor and the number of competitors on the market (62.12% of all companies participating in the survey assert that there are more than 20 market players in their field) is positive and stronger as compared to the correlation values of the other aspects. The correlation between the two variables is also statistically significant (see table 2 below), but p-values are higher than 0.05. As far as the other aspects are concerned, the correlation is either weak or very weak; moreover the correlation between the respective variables and a company's field of activity is either statistically insignificant or the significance can not be asserted (as in the regression analysis between a company's main field of activity and price formation on the market--45.58% of the respondents share the belief that the price of a product/ service is a demand and offer freely generated result).

Despite closer and higher values of the multiple r as compared to the case presented above, the correlations between the sales volume and market barriers (60.28% of the respondents think that competitors' behaviour is the main market barrier in their field of activity), respectively price setting-up, number of companies on the market, and competition within a certain field of activity (51.29% of the respondents consider that in their field of activity the competition is fierce) are not statistically significant. In the case of the regression analysis between the sales volume and a company's main goal (47.29% of the respondents consider that a company's main goal consists in satisfying the end consumer), the "significance F" takes the value "0.057" and thus, one can not say whether the correlation is statistically significant or not. There is a positive correlation ("multiple r" equals 0.21) between a company's number of employees and the number of companies on the market, correlation which is statistically significant (significance F = 0.0019 < 0.05). The correlations between a company's number of employees and the other four variables are statistically irrelevant (the values of "significance F" exceed 0.05), fact confirmed by high p-values.

The positive correlations between the nature of capital and the number of companies on the market, on the one hand, and the competition in the respective field of activity, on the other, though characterized by a rather small value of the "multiple r" (0.24 and respectively 0.196) are stronger than the ones obtained in the analysis of the other three variables; moreover, the correlations are statistically significant (F = 0.0003 referring to the correlation between the form of property and the number of companies on the market, and F = 0.0108 regarding the competition in the respective field of activity). The analysis shows that within a field of activity with more than 20 companies, the companies with private, 100% Romanian capital make an important factor (p-value = 0.054). In addition, meaningful factors within a field of activity with a fierce competition are the companies with private, full Romanian capital (p-value = 0.04), companies with private, mostly foreign capital (p-value = 0.018) and companies with private, full foreign capital (p-value=0.011); the latter factors greatly influence the competition in a field of activity (see table 3).

In the case of the other variables investigated through three aspects, namely market barriers, price formation on the market and a company's main goal, the correlation with "the form of property" is statistically insignificant, higher p-values being displayed.

4. CONCLUSIONS

The statistical analysis reflects that there is a correlation between: a) the company's main field of activity and the number of companies on the market (the structure of competition on the market); b) the company's number of employees and the number of companies on the market (the structure of competition on the market); c) the nature of capital and the number of companies on the market (the structure of competition on the market) and the level of competition within a field of activity. Thus, a company's field of activity, number of employees and the nature of capital would be, according to our survey, relevant factors to determine the level of competition on the Romanian market. Though our research has provided answers to the set (research) question, the analysis carried out has its own limitations, since for instance, it should be based, as well, on sectors or certain fields of activity.

5. REFERENCES

Accut, M. and Elliot, C. (2001). Threat-Based competition policy, European Journal of Law and Economics, 11:3; 309-317, Kluwer academic publishers, Netherlands, indexed in Social Science Citation Index, ISSN 0929-1261.

Bannerman, E. (2002). The future of EU competition policy, Centre for European Reform, Available from: http://www.cer.org.uk/pdf/cerwp_13fcp.pdf Accessed: 2009-06-29

Maks, H. (1992). The "New" Horizontal Agreements Approach in the EU: An "Economic" Assessment, Intereconomics, Jan/Feb, pp 28-35, Springer Link, ISSN 0020-5346 (Print)

Sosnick, S. (1958). A critique of concepts of workable competition, The quarterly Journal of Economics, Vol. 72, No. 3, pp. 380-423, Harvard University, ISSN 0033-5533

Stigler, G. (1971). The theory of economic regulation, The Bell Journal of Economics, Vol. 2, pp. 3-21, ISSN 0361915X.

DIMA, M[ihaela] A[lina] & SANDRU, I[oana] M[aria] D[iana] *

* Supervisor, Mentor

Tab. 1. The opinion of the respondents related to the types of
the barries on their market

Answer No. of % of
 respondents the respondents

Governmental interventions 55 13.00

Legal barriers 168 39.72

The competitors' behaviour 255 60.28

Production capacity of the 82 19.39
competitors

Legal barriers 168 39.72

The competitors' behaviour 255 60.28

Production capacity of the 82 19.39
competitors

Tab. 2. Correlation between the number of competitors on the
market and a company's main field of activity

 ANOVA

 df SS MS F Significance
 F
Regression 4 2.519789 0.629947 2.713908 0.029608
Residual 420 97.48962 0.232118
Total 424 100.0094


 Regression Statistics

Multiple R 0.196847
R Square 0.038749

 ANOVA

 df SS MS

Regression 6 4.114304 0.685717
Residual 418 102.0645 0.244173
Total 424 106.1788

 ANOVA

 Significance

 F F
Regression
Residual
Total 2.80832 0.010881

Tab. 3. Correlation between the nature of capital and the
competition in the respective field of activity

 Coefficients St. Error t Stat P-value

Intercept 2.01E-16 0.24707 8.12E-16 1
X Variable 1 0.4375 0.276232 1.583813 0.113993
X Variable 2 -2.1E-16 0.377405 -5,7E-16 1
X Variable 3 0.498024 0.249015 1.999975 0.04615
X Variable 4 0.382353 0,261199 1.463837 0.14399
X Variable 5 0.603175 0.254792 2.367318 0.018372
X Variable 6 0.653846 0.256396 2.55014 0.011124