Do Chinese dairy firms have market power? an estimation of market power with price heterogeneity

Abstract

Purpose The purpose of this paper is to investigate market power in dairy industry in China. Specifically, we analyze market power for different firm size, locations of region and city empirically. Design/methodology/approach We estimate the market power by controlling the unobserved price heterogeneity. The econometric model was developed through a typical production function. We added three dummy variables to differentiate firms of different sizes, at urban or rural locations, and in east or other regions, according to the characteristics of the dairy industry. A sample including 511 observations were used to do the regression. Findings Our results show that Chinese dairy industry as a whole is a competitive industry in general，while the large firms have gained considerable market power. The firms locate in the eastern area grow slower than firms locate in the middle and western area. Originality/value The authors believe that this is the first study to analyze the market power in China’s dairy industry by controlling the unobserved price heterogeneity. Dairy is usually thought to be competitive, while in our paper we found that large firms can exercise market power while small firms operate in a competitive market.