Working Paper: Profitability in Emerging Markets: Efficiency or Market Power? A Study of Indian Firms

No: WP-2020-003

Author: Ramesh Jangili

Title: Profitability in Emerging Markets: Efficiency or Market Power? A Study of Indian Firms

Abstract: The legal systems in emerging economies are weak and hence unsuccessful in completely eliminating market abuse, which could benefit some segment of firms to earn higher profits. This further leads to market imperfections and eventually to higher concentration. The problem persists even after strengthening market discipline and improving overall competition in emerging markets. Large and group firms in these markets could gain differential advantage and destroy value. We analyse the profitability of firms in an emerging economy, India; and find that large and group firms are more profitable than small and standalone firms. Further, we explicitly use cost efficiency of firms to understand the impact of market power on profitability and find that large firms in concentrated industries generate more profits. We also find that higher profitability of large firms is due to market power.

Keywords: Profitability, Size, Group Affiliation, Cost efficiency, Market power

JEL Code: L22, L25, D22