Measurement of market power for the environmentally regulated Korean iron and steel manufacturing industry

For industries in which where market prices of certain inputs are not available, measuring the degree of market power by using the markup over the marginal market cost may be inappropriate. With regard to the Korean iron and steel manufacturing industry, which is subject to environmental regulations, the calculation of the price of abatement capital is hindered by a lack of relevant data. To increase the reliability of market power markups, this paper estimates the restricted cost function in which abatement capital is assumed to be quasi-fixed at an optimal level and the supply relation. The degree of market power for the industry, measured as the ratio of the estimated market power markup to the supply price, was estimated to be 0.54 on average between 1982 and 2001. The results indicate that ignoring environmental regulations can overstate the degree of market power by approximately 12%.

Research highlights
► We measure the degree of market power (MP) for the Korean steel industry.
► We estimate the restricted cost function and the supply relation.
► Pollution abatement capital is assumed to be quasi-fixed at an optimal level.
► MP was estimated to be 0.54 on average between 1982 and 2001.
► Ignoring environmental regulations can overstate MP by approximately 12%.