This research has received financial help through the European Union’s Horizon 2020 research program, Grant Agreement 635188. 6 th Global Summit on Aquaculture & Fisheries May 25 – 26, 2017. Osaka, Japan EFFECT OF THE MARKET STRUCTURE ON THE EUROPEAN FISH AND SEAFOOD PRODUCTION INDUSTRY PROFITABILITY Prof. Dr. José L. Fernández Sánchez* Prof. Dr. José M. Fernández Polanco Prof. Dr. Ignacio Llorente Prof. Dra. Elisa Baraibar Diez Prof. Dra. María D. Odriozola Zamanillo Prof. Dr. Ladislao Luna Sotorrío Professor in Business Economics and researcher of IDES-UC research group E-mail: fernandezjl@unican.es.
INTRODUCTION RESEARCH AIM Research aim The purpose of this research is to analyse the effect that the market structure could have on the profit margins of the European (EU28) fish and seafood producers. 6 th Global Summit on Aquaculture & Fisheries
THEORETICAL FRAMEWORK RESEARCH AIM Market Structure and Performance • Among the theory of industrial organization there have been basically four general approaches previously employed to analyse the relationship between the market structure of an industry and its economic performance (Digal and Ahmadi-Esfahani, 2002): industry case studies, models in the structure-conduct- performance (SCP) paradigm, NEIO models, and time-series models. • According to SCP approach, structural characteristics of an industry (i.e., industry concentration) determine the conduct of firms in the industry (price and output policies, product development and promotion policies, and behaviour toward rivals), which, in turn, determines the market performance, typically measured by profits or price-cost margins (Carlton and Perloff, 1990; Sexton and Zhang, 2000). • Within the SCP framework, the testable hypothesis is that average profit in concentrated markets is higher than in less concentrated markets. 6 th Global Summit on Aquaculture & Fisheries
THEORETICAL FRAMEWORK RESEARCH AIM Market Structure and Performance • However, the SCP paradigm has been subject to much criticism. Demsetz (1973), for instance, questioned the validity of the SCP test and asserted that asymmetry in technology and corporate efficiency causes the observed positive correlation between industry concentration and profitability. That is some firms are more efficient than others, producing comparable products at a lower cost. The efficient firms grow over time, resulting in larger and more efficient firms and, therefore, because of it, we have industries with higher concentration (through market expansion). • Indeed, it could be that industry structure and profits are simultaneously determined (Stiegert et al., 2009). Thus, if several firms in an industry are very efficient, they may earn large rents on their efficiency and also grow their market shares, so that industries with a few such efficient firms will be concentrated and this concentration is derived not by high prices but low average costs for some firms. 6 th Global Summit on Aquaculture & Fisheries
METHODOLOGY RESEARCH AIM • This research employs the Structure–Conduct–Performance (SCP) paradigm to investigate the simultaneous relationship between price-cost margin, industrial concentration, and technical efficiency in the European fish and seafood production industry. • So, following Setiawan et al. (2013), it is hypothesized that the mathematical relationship between price-cost margin ( PCM ), industrial concentration ( IC ), and technical efficiency ( TE ) can be formulated through the following non-recursive structural model: PCM = f ( IC , TE , SIZE , GROWTH ) IC = g ( PCM , GROWTH , CI ) TE = h ( IC , SIZE ) 6 th Global Summit on Aquaculture & Fisheries
METHODOLOGY RESEARCH AIM • This simultaneous system of equations has been estimated using the Full Information Maximum Likelihood (FIML) estimation method so that we can obtain consistent estimates of the parameters that are more efficient than those obtained by other econometric methods. • Annual industry-macro data from different private and public sources (AMADEUS, STECF, and EUMOFA databases) for each of the EU28 countries during the period 2008–2013 has been employed to estimate the structural model parameters for the fishing and aquaculture sectors. 6 th Global Summit on Aquaculture & Fisheries
ANALYSIS OF RESULTS RESEARCH AIM Table 1 Descriptive statistics of variables used in this research Fishing sector Aquaculture sector N Mean SD N Mean SD - 1.34 93 29.72 47 5.71 34.08 PCM : Net profit margin (%) 155 11.88 13.30 129 11.44 12.88 IC : Industrial producers’ concentration (CR4) 102 44.50 25.06 27 24.58 32.41 TE : Technical efficiency (%) 57 95.08 194.56 55 109.95 143.46 SIZE : Total assets in constant euros (mill. €) 114 6,531 9,977 87 3,107 5,728 SIZE : Total employment (number of employees) 162 6.05 12.63 135 5.87 13.46 GROWTH : Industry income growth (%) 124 238.87 665.15 128 115.30 135.22 CI : Capital output ratio
ANALYSIS OF RESULTS RESEARCH AIM • The average price-cost margin ( PCM ) for the European fish and seafood production industry was negative for fishing ( - 1.34%) and positive for aquaculture (5.71%). • The average concentration ratio (CR4) in the European fish and seafood production industry was around 11.88% in the period 2008-2013 what means that this industry is characterized as a very competitive market although the range of the CR4 index is very wide so that depending on the country we have different market structures (from very competitive to oligopoly markets). • Furthermore, technical efficiency ( TE ) of European fishing firms are, on average, more efficient than aquaculture firms (a mean of 44.50% and 24.58% respectively). • Regarding industry size ( SIZE ), European fish farms are, on average, larger than fishing firms when this variable is measured with the value of total assets in the industry whereas they are smaller when total employment in the industry is employed to measure the size variable. 6 th Global Summit on Aquaculture & Fisheries
ANALYSIS OF RESULTS RESEARCH AIM • Likewise, the average capital output ratio used to measure industry capital intensity ( CI ) of European fishing firms doubles the ratio of farm firms (238.87 and 115.30 respectively) what means that fishing firms need a strong investment in fixed assets to do their productive activity. • As for market growth ( GROWTH ), the average growth in the European fish and seafood production industry was, on average, around 6% during the period 2008-2013. 6 th Global Summit on Aquaculture & Fisheries
ANALYSIS OF RESULTS RESEARCH AIM Table 2 FIML structural estimates for the European fish and seafood production industry (regression weights) Fishing sector Aquaculture sector Independ (2008-2013) (2008-2012) variable PCM IC TE PCM IC TE - 69.305** CONST ANT 10.682** 38.012** 22.715* 9.352** 28.415** PCM 0.227 0.094** - 1.011 - 0.734 - 2.728** IC 1.306** - 0.453 TE 1.782** - 0.200** - 0.003 SIZE 0.131** 0.008** - 0.026 - 0.065** GROWTH 0.136** 0.495** CI 0.000 0.008* Goodness of fit R 2 0.861 0.145 0.634 0.860 0.258 0.881 Stability index 0.764 0.263 Wald test 4.367** 1.944** Note : For the fishing sector, the size variable ( SIZE ) was measured with total assets whereas, for the aquaculture sector, total employment was used. * Significance at the 5% level ** Significance at the 1% level
ANALYSIS OF RESULTS RESEARCH AIM • The results show that market growth is negatively related to market concentration whereas capital intensity and the price-cost margin are positively related with industry concentration. • Also, it has been found that higher industrial concentration leads to lower technical efficiency. This result is in line with the quiet-life hypothesis as it indicates that there is no pressure for the firms in the highly concentrated industry to increase their efficiency. • On the other hand, technical efficiency is affected positively by the sector size (significance at the 1% level). Further, technical efficiency affects price-cost margin positively since technical efficiency lowers the per unit cost of production. • Finally, industry concentration, technical efficiency, and market growth affect positively industry price-cost margins (at least, in the case of fishing sector, this effect has been statistically very significant) whereas industry size had a negative effect on the fish and seafood producers’ profit margins. 6 th Global Summit on Aquaculture & Fisheries
CONCLUSION • A good fit of the whole model was obtained and estimation RESEARCH AIM results are majorly in agreement with economic theory. • The results of our analysis indicate that there is a simultaneous relationship between industrial concentration, technical efficiency, and price-cost margins. • Furthermore, the results show that there is a two-way relationship between industrial concentration and price- cost margin so that high industrial concentration may lead to high price-cost margin and high price-cost margins increases concentration in the long run. • Moreover, technical efficiency affects price-cost margin positively, since technical efficiency lowers the per unit cost of production. • Also, it has been found that higher industrial concentration leads to lower technical efficiency what is in line with the quiet-life hypothesis. 6 th Global Summit on Aquaculture & Fisheries
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