Monopoly Power, Import Competition, and Price Liberalization in the CSFR

Abstract

The post-socialist countries have inherited monopolistic market structures, in which few but large firms produce for the home market in many branches of the economy.¹ Beyond the standard microeconomic arguments that price-setting firms tend to produce lower quantities and charge higher prices compared to price-takers, the possible presence of monopoly elements in the transition economies of Eastern and Central Europe is of special concern for a number of reasons. First, it is apparent that the enormous level of concentration under central planning was well beyond the degree justified by the possible presence of scale economies. Second, as large enterprises are privatized, there is reason to fear that the hoped-for benefits of the economic reform package will be swallowed up by monopoly profits, with negative consequences for both growth and distribution. Third, one of the most important, and still unresolved, issues in privatization is the timing of restructuring — one of the most important components of which is the breakup of the large enterprises into firms that are smaller and “more competitive” (in every sense). Finally, the domination of enterprise managements by members of the “nomenklatura” imparts a political aspect to the problem of monopoly: the public is likely to have especially low tolerance for the reform policy if this class is perceived as its prime beneficiary.

It is pointless to liberalize prices in a monopolistic environment.

Vaclav Klaus, 1990.

We would like to thank Alena Buchtikova and Jarko Fidrmuc for valuable research assistance with the calculations and data gathering.