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Identifying Competitive Neutrality
of SOEs in China:
A Case of Three Electronics Industries
Japan Economics Association, 2017
Mariko Watanabe Competitive Neutrality JEA, 2017 1 / 24
Competitive Neutrality of SOEs?
SOEs does or does not harm market competition?
Alleged“ predatory pricing ”
What is done here?
Identify competitive neutrality of SOEs in three electronics industries in
the 2000 ’s China
Quantifying the willingness to pay by estimating demand function
Built and test a simple supply model of “Neutrality” violation due to
Application of structural estimation to capture “nature of competition”
in WTP-price dimensions
Capturing competition with WPT-Price dimension
Under construction of the structure. Only demand side.
Mariko Watanabe Competitive Neutrality JEA, 2017 2 / 24
Literature: SOE and Competition Neutrality
Theoretical Model: Logit Demand and Competition with soft budget
Positioning in WTP-Price dimension from Demand Estimates
A Reduced form test on Competition with soft budget constraint
Mariko Watanabe Competitive Neutrality JEA, 2017 3 / 24
SOE and China: Background
1 Why focusing on SOEs ? Corporate governance/Competition Law
SOE should be regulated?
If yes, why?
Ownership or Competition?
2 History of Economic Reform in China
Ineﬃcient management under planned economy
Monopolistic behavior and mergers by SOEs since the 2006
Privatization or Competition Neutrality?
Mariko Watanabe Competitive Neutrality JEA, 2017 4 / 24
SOE and China: Background
3 types of markets in China
1 Monopoly connected with political power
Petro reﬁnery, Railways, Telecommunication
2 “Bad” Mixed market
Competition among heterogeneous entity, that is, SOE, Private, FOE
with Overcapacity, Keen price competition.
Electronics, Steel, Alminum
3 “Good” Mixed Market Pure private market
Competition with innovation
Internet related ﬁrm
Mariko Watanabe Competitive Neutrality JEA, 2017 5 / 24
SOE and Competition: Literature 1
Mixed Market literature
Outcome via competition among“ proﬁt maximizer ”and“ welfare
Matsumura and Matsushima (2004)
Luts and Pezzino (2010)
De Fraja (2009)
Gosh and et.al (2015)
Target: Public utility industries such as electricity
NOT applicable to current China’s SOEs issue.
China’s SOE has never required to maximize“ social welfare ”until
Mariko Watanabe Competitive Neutrality JEA, 2017 6 / 24
SOE and Competition: Literature 2
OECD ’s Competitive Neutrality Framework
Corporate Governance code to SOEs
SOEs should maintain“ competition neutrality ”
TPP were going to apply this principle.
Competitive Neutrality Framework
SOE should not enjoy competitive advantage thanks to their ownership.
SOE should comply with competition neutrality principle.
What conducts violate the neutrality?
Mariko Watanabe Competitive Neutrality JEA, 2017 7 / 24
Anti Competition Conducts
Chaporbianco and Christiansen (2011)
1 Predatory Pricing
Set price unproﬁtably low so as to expel out their rivals
2 Raising Rivals’ cost
3 Cross Subsidies
When SOE running on multiple market, give subsidies from on market
to another so as to suppress the rivals
4 Strategic Adoption of ineﬃcient technology
This paper will test the ﬁrst point: Predatory Pricing
Mariko Watanabe Competitive Neutrality JEA, 2017 8 / 24
SOE and Competition, China
Competitive non-neutrality may be allegedly a cause of “over capacity”
Iron and Steel Industry : G20 Iron and Steel Forum
An essay of Zhou Qiren (2006)
Mariko Watanabe Competitive Neutrality JEA, 2017 9 / 24
Structure: Demand and Supply
1 Demand: Nested Logit BLP model
2 Supply: Competition among soft budget and hard budget constraints
If soft budget constraint ﬁrm worsen the quality of market competition,
it violates competition neutrality.
Hypothesis here is “soft budget generates excess price competition, and
deteriorate WTP of products”
Mariko Watanabe Competitive Neutrality JEA, 2017 10 / 24
Heterogenous constraint ﬁrm A and B
Generic marginal cost c for both ﬁrm A and B.
Firm A can get subsidy D even when she make deﬁcit.
Then, realized cost becomes as follows:
cA = c − D (1)
cB = c (2)
Thus, Firm A can set price as low as,
pA ≥ c − D = cA
pB ≥ c = cB
Mariko Watanabe Competitive Neutrality JEA, 2017 11 / 24
Equilibrium constraint ﬁrm A and B
3c − 2D + tB + 2tA + BA − BB
3c − D + tA + 2tB + BB − BA
Thus, the market share of A, xA, becomes as follows:
2tA+tB +BA−BB +D
3(tA+tB ) (D ≤ tA + 2tB + BB − BA)
1 (D ≥ tA + 2tB + BB − BA)
Proposition 1 Amount of debt aﬀects level of equilibrium
price and market shares.
Proposition 2 Equilibrium price of the rival of a soft budget
constraint ﬁrm is higher than that of a soft budget
Mariko Watanabe Competitive Neutrality JEA, 2017 12 / 24
Utility function and Competitive Position
uijt = −αi pjt + βXjt + Unobservablejt + error (7)
Consumer will choose products on Willingness to Pay (WTP)-P dimension.
CSijt = WTPijt − Pjt
Firm position their product on this dimension
Beneﬁt (Diﬀerentiation) advantage position: high WTP and
Cost advantage position: low Price and middle/low WTP
Mariko Watanabe Competitive Neutrality JEA, 2017 13 / 24
30 city market survey data from GfK research China.
Air Conditioner 2000-2011
Mobile Phone 2001-08
Color TVs 2000-07
Demographic Data : China Urban City Statistical Yearbook
Ownership Data: Companies proﬁles and listed companies annual
Financial Statement of listed in Shanghai and Shenzhen markets
Mariko Watanabe Competitive Neutrality JEA, 2017 14 / 24
Shares of production by ownership :AC
Mariko Watanabe Competitive Neutrality JEA, 2017 15 / 24
Shares of production by ownership :CTV
Mariko Watanabe Competitive Neutrality JEA, 2017 16 / 24
Shares of production by ownership: Mobile
Mariko Watanabe Competitive Neutrality JEA, 2017 17 / 24
Demand Estimates: AC, CTV, Mobilephone
AC CTV Mobilephone
ln(sj ) − ln(so)
price/wage:α -5.496*** -1.110*** -6.422***
(0.431) (0.060) (0.797)
cooling capacity 0.0001***
power consumption capacity -0.0004***
HP: 1 to 2 0.544***
(Reference=1HP below) (0.124)
HP: 2 and over 0.476***
Screen size: 21 to 32 inches 0.316**
(Reference= 21 inches and below) (0.034)
Screen size: 32 inches and over 0.658***
Network: TDS-CDMA 0.823***
Constant -5.243*** -2.432*** -8.418***
(0.247) (0.243) (0.461)
N 17914 12432 46741
R2 0.487 0.850 0.598
Standard errors in parentheses
*=p < 0.1, **= p < 0.05, ***= p < 0.01.Mariko Watanabe Competitive Neutrality JEA, 2017 18 / 24
Price Beneﬁt Supply Curve - CTV market
(1) Hard Constraint (2) Soft budget constraint
ln priceconstraint ln pricesoftbudget
ln beneﬁtown 4.527*** 6.354***
ln beneﬁtothers -3.995*** -6.127***
ln mcsoftbudget 0.097 0.277***
ln mcconstraint 0.308*** 0.016
ln debtown -0.047***
ln debtrivals 0.076
constant -3.466 4.589***
N 5734 6377
R2 0.709 0.709
p-values in parentheses
* p < 0.1, ** p < 0.05, *** p < 0.01
(Note) Marginal costs (mc) are computed from the equation: pjt − mcjt = −qjt
is estimated from demand estimates in previous setion.
Mariko Watanabe Competitive Neutrality JEA, 2017 24 / 24
Current work has NOT yet incorporate supply side model. Under
However, demand analysis provided several interesting factors.
1 WTP-Price Map can describe “competitive position”. The maps
SOE, Private takes “cost advantage position’
FE takes “beneﬁt, diﬀerentiated advantage position”
Following development, WTP-price curves got horizontal.
In CTV market, WTP got shrink, although price kept low.
2 Price Subsidy function regression implies existence of soft budget
Price set by Soft budget SOE get lower as their debt/subsidy is large.
Mariko Watanabe Competitive Neutrality JEA, 2017 25 / 24