Measuring market imperfection in the manufacturing sector: Theory and evidence from India

In this paper we have looked at the structure of competition in the Indian corporate sector during 1989 - 2003 and found that the new industrial policy has not been able to foster greater competitiveness in organized industries. In spite of an increase of in the number of firms, the industry has not become more competitive in terms of the difference between price and marginal cost. The firms that have entered are small players in the market and no significant entry of middle-sized firms has taken place. In order to deal with the 'missing middle' aspect of industrial concentration in India, we have used a leadership model to estimate the mark-ups for groups of small and large firms. The theoretical model suggests that sample classification is necessary in order avoid bias in mark-up estimates. The sub-game perfect equilibrium in the leadership model also suggests that the mark-up of small firms is different from that of the large firms and possibly higher under certain conditions, which is partly supported by the econometric finding in the Indian context.