Market power, EU integration and privatization: The case of Romania

This paper investigates the effects on pricing behavior of firms in a transition economy resulting from integration into the European Union's Common Market and changes in ownership. We use a semiparametric model with a rich panel of manufacturing firms in Romania from 1995 to 2003 to estimate firm-level markups. We find that markups are higher in more concentrated industries and less exposed to foreign competition. Trade integration appears to generally increase competitive pressure on markups. Industries exposed to more international competition experience a larger change in markups following integration into the European Union's Common Market. However, as the initial impact of tariff reduction fades away, higher markups become an important element in firms' pricing strategies. We also find that foreign firms and private domestic firms charge significantly higher markups on average than state-owned enterprizes.