# **5. CONCLUSIONS**

**A stylized fact emerging in the recent empirical literature is the increase in average levels of market power across countries, in both developed and emerging economies. This paper aims to bring new evidence about the evolution of corporate market power in Romania and the implications for competition dynamics.** It uses markups as a proxy for market power and explores firm-level heterogeneity to identify the underlying drivers of aggregate trends. The paper applies the production approach—following De Loecker and Warzynski (2012); De Loecker and Eeckhout (2018); and De Loecker, Eeckhout, and Unger (2020)—to estimate markup at the firm-year level for Romania. The Romanian Structural Business Survey data set is used to apply this methodology.

**Results show that the aggregate markup in Romania increased by around 15 percent between 2008 and 2017. However, this aggregate performance masks a lot of heterogeneity, the first being heterogeneity of markups across the main sectors.** While in manufacturing, (sales-weighted) average markups experienced a declining pattern of −5.7 percent during 2008–17, there was an opposite, and much more rapid, trend in services, with an aggregate change of 42.2 percent.

**Second, at the firm level, results suggest that a key driving force behind this aggregate trend was the ability of the top decile of firms in the markup distribution to increase their markups.** This increase has been faster than for the rest of the firms. Firms in the 90th percentile of the markup distribution increased their (sales-weighted) average markup by 28.5 percent between 2008 and 2017, while the rest of firms (that is, those below the top decile firms) experienced a completely opposite trend: their weighted markup contracted by 8.3 percent over the same period.

**This sample of top decile firms does not seem to follow the typical superstar firms’ profile, which suggests that the increase in markups in Romania might be associated with an environment that is less conducive to competition.** The top decile firms in the markup distribution are 46.8 percent smaller, 91.0 percent less productive, and 33 percent less likely to invest in intangible assets than the rest of the firms in the markup distribution, and they are overrepresented in less knowledge-intensive service sectors. Therefore, they do not seem to follow the typical superstar firms’ profile (typically larger, more productive, and more likely to invest in intangible assets). This suggests that the increase in markups in Romania might be more due to relatively weak competition rather than to changes in the nature of competition, where superstar firms (usually more efficient and innovative) are rewarded with greater market share. In fact, a decomposition exercise shows that the increase in aggregate markups has been driven mostly by incumbents rather than by new entrants and exiting firms. These results could be interpreted as a sign of consolidation of market power among existing firms. Several policyrelated factors could explain this result; among them, government interventions and regulations that restrict competition by reinforcing dominance or limiting entry, facilitating collusive outcomes, or increasing the cost to compete in markets, and by discriminating and protecting vested interests. In this regard, illustrative evidence provided by Pop and Ore Monago (2020) shows that despite reforms, regulations that restrict entry and rivalry are still present in the retail trade sector, which concentrates a substantial proportion of high-markup firms in the Romanian economy.

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