Market Power and Firms' Performance: A Case of Indonesian Manufacturing Industry

Abstract

Purpose This study aims to investigate the relationship between market power and firms’ performance in the Indonesian manufacturing industry. Design/methodology/approach Using the Statistik Industri Besar dan Sedang from BPS we extract the data about the market share and productivity of each firm that will represent market power and the firms’ performance respectively. The dataset also allows us to apply dynamic panel data that might address the endogeneity and reverse causality problem which could occur in the estimation. Findings The results suggest that market power has an inverted U-shaped relationship with firms’ productivity. Further analysis shows similar conditions also occur in all selected industries except automotive. Research limitations/implications This study could help policymakers if they want to influence firms’ performance based on their market share. Originality/value This paper applies the DPD method to address the endogeneity problem that might occur in the previous studies.