How trade liberalization and global value chains changed prices in Slovenia

When many firms in the economy compete with each other, the prices naturally go down to the level of production costs. But when competition is low, companies are more free to raise their prices above the actual costs and thus gain market power. Several studies have suggested that market power in the US went up with an estimated 40 percentage points in the last 40 years (Hall, 2018, De Loecker et al. 2020). Many scientists believe that this phenomenon is linked to the rise of some giant companies that sometimes run an industry by themselves. From a macroeconomic point of view, this is not good news: it means consumer prices rise, resources are inefficiently allocated, antitrust issues set in, innovation is stifled and finally, economic growth slows down. So, if this is the case for the US, what is happening in Europe? This briefing presents evidence for Slovenia, where market power has gone up considerably from 1994 to 2015 but has not risen above the levels observed in similar small open European economies, like Belgium. The Slovenian rise of market power is largely explained by its convergence to the Western European Economy. Not only did the Slovenian economy recently transform into a market-based economy, but trade was also liberalized and the economy was integrated into global value chains. Even the composition of Slovenian products changed, from final goods to intermediate ones. We also found an important role for international trade as its competitive effect restrained markups of exporting firms in exchange for foreign market access. The recent economic shock caused by the coronavirus should catapult the issue of market power to the top of the policy agenda. Since the corona crisis disrupts the global value chains, international trade is expected to decline, also affecting consumer prices and markups. This could potentially increase the markups of Slovenian firms because they are largely dependent on export and import. As a result, Slovenia, and other countries that are highly integrated in global supply chains, might suffer more from the corona shock.status: publishe