The Social Costs of Imperfect Competition: The Case of the Peruvian Manufacturing Sector, 1990-1996

Abstract:     
This paper estimates the social costs of imperfect market structures (e.g., Oligopoly and Monopoly) in the Peruvian Manufacturing Sector for the period 1990-1996. These costs are computed using the simple Harberger (1954) method adjusted by Tello's model (1995). The method is applied at the level of firms, branches of the SIIC (4 digits) and the whole manufacturing sector. Under this method, the magnitude of the costs depends upon: the demand price elasticity; the firms conjecture in the market; the equilibrium rate of return of the capital from a competitive market; the sales of the firms; the factors that determines unit production costs; and the external factors to the firms such as the economic policy.

Among the main results that arise from the calculations are the following: First, the structural reforms (in particular, trade and deregulation reforms) carried out in the first Government of Fujimori between 1990-1994 seemed to have decreased the distortions costs from imperfect competition at the level of firms and branches of the SIIC 4 digits level. Thus, in 1990 these costs represented 13% of the total GNP from manufactures and in 1994 decreased up to 2.5%. Second, the sources of these costs were two. One due to market distortions and the other due to the firms' losses caused by the structural reforms. More than 50% of the total cost was explained by this second source. Third, from 1994 and on (up to 1996), it seems that solvent firms have learned to adjust to the new market conditions and the distortions costs have begun to rise. On the other hand, some others have not adjusted at all and still are having economic and financial problems with negative profits. Thus, in 1996, the cost of the distortions from both sources represented 9% of the total GNP of the manufactured sector. Also for 1996 the insolvent firms costs dominate the cost of the distortions.

Keywords: social costs, imperfect competition, structural reforms

JEL Classification: D43, D6, L13, L6

working papers series