The Impact of Product Market Power on Partial Productivity: Evidence from Indian Firms

Product market power can have a differential influence on the partial productivity of various inputs. The present study relates partial factor productivity to market power, factor shares, and the level of technology. We use the Indian firm-year panel for the period 1995-2021 to empirically test this relationship.

To measure market power, firm-level markups are estimated using the Production Function Approach. Partial productivity measures of each input are constructed non-parametrically using Tornqvist indices. The model is estimated using the System Generalized Method of Moments that addresses endogeneity concerns.

The results suggest a U-shaped relationship between product market power and the partial productivity of capital, while an inverted U-shaped relationship for labour and raw materials. Thus, in a competitive environment, when the market power increases, it improves the productivity of labour and raw materials, but reduces the productivity of capital. On the contrary, when the market is less competitive, the opposite happens.

These findings have serious implications for income distribution, employment dynamics, factor prices and costs.