Measuring market power and cost efficiency: An application to the Chinese milk industry

With the increase of concentration in the fluid milk industry, firms' ability to exercise market power has aroused the concern of the Chinese government. To separate the market power effect of concentration from its cost efficiency effect, we developed an empirical model for measuring these two kinds of effects. The model is based on a theoretical framework which is known as the 'New Empirical Industrial Organization (NEIO)' approach. Data from the Chinese fluid milk industry for the 1993-2011 time periods are used to evaluate the effects of concentration. The findings show the cost efficiency effect outweighs the market power effect.