Is Market Power or Efficiency behind Economic Performance? The Case of the Czech Food Processing Industry

Abstract

This article attempts to identify the main reason for the profitability of Czech food processing companies. For this purpose, an analysis of the profitability of the food industry was carried out in the framework of the Structure-Conduct-Performance (SCP) paradigm; specifically, the relative market power (RMP) hypothesis versus the efficiency hypothesis was tested. The analysis used data at the micro-economic level of six Nomenclature of Economic Activities (NACE) sub-sectors of the Czech food processing industry in the period 2016-2020. The final dataset consisted of 2639 observations of 623 companies. The data came from the database of Bisnode Albertina and the Czech Statistical Office. Stochastic frontier analysis (SFA) and a regression model were used in the study. Based on the research carried out, performance does not seem to be explained by a greater market power represented by a firm's market share. Only one sub-sector was proven to have a higher marginal effect of market power on profitability than technical efficiency. Thus, it can be concluded that companies with relatively larger market shares do not have greater market power and thus do not achieve higher profitability.