Market power or efficiency? An empirical study on the Indonesian fertilizer industry

Abstract

This article aims to analyze the Indonesian fertilizer industry's market structure, efficiency, and performance determinants. This study applies the Structure-Conduct-Performance (SCP) framework proposed by the Harvard (market power) and UCLA-Chicago School (efficiency structure) schools of thought. We run Data Envelopment Analysis (DEA) and panel data regression to analyze the panel data constructed from annual reports of fertilizer producers in 2008 – 2017 and statistical publications from the agriculture ministry. DEA is a nonparametric method that measures technical and scale efficiencies. Meanwhile, panel data regression estimates the determinants of firm performance (ROA). The results show that the fertilizer industry has market power based on three characteristics; the number of incumbents (five), degree of market concentration (95.48 percent), and barrier to entry condition. Meanwhile, its industrial technical efficiency score is low (0.584), but its scale efficiency score is high (0.950). The results also show that firm performance is determined by efficiency, not market power. Both technical and scale efficiency positively and significantly affect performance. On the other hand, market power does not significantly affect performance. This finding supports the UCLA-Chicago School that efficiency is the main factor of firm performance.