Evaluating the degree of Monopoly In Iran's Large Scale Industries: Stochastic Frontier Function Approach

Purpose: Performance of monopolies in the Iranian economy is not only a result of the behavior of certain economic actors, based on principle 44 of the Constitution as the legal basis after the 1979 Revolution. Due to the responsibilities outlined in this principle, state monopolies became a dominant force in Iran's economy, while the private sector continued its activities as a supplement to the state economy. The success of this dependent sector relied on the extent of coordination with the government. The enactment and implementation of the Law on Amending the General Policies of principle 44 in the Constitution was a reaction to the undesirable performance of state monopolies. This law, passed by the Iranian parliament in 2008, aimed to reduce government monopoly and increase private sector participation and competition in the Iranian economy.
It is expected that the implementation of this law would transform Iran's economy from a monopolistic state to a competitive one, providing consumers with greater access to higher-quality goods and services while reducing the costs associated with monopolies. To assess the achievement of the objectives of this law, it is necessary to study the structure and performance of Iran's economic markets by using scientific methods to evaluate the degree of monopolistic power and the extent of changes in monopolistic welfare costs.This article attempts to measure the degree of monopoly in Iran's major industries during the period from 2002 to 2019. To achieve this goal, the data from ten two-digit industries of Iran's industrial sector are used, and the stochastic frontier function approach is applied to measure the corresponding mark-up.
Methodology: In this research, the random frontier approach is used to evaluate the intensity of competition (monopoly) in Iran's major industries within the cost function framework. The cost function is denoted as C = (W, Y, T), where T represents the technology level, Y is the output level, W is the vector of factor prices, and C is the minimum cost associated with each output level. By estimating the cost function, the marginal cost can be estimated for each production level. Also, by inputting the price data, the size of the markup can be determined. Based on the size of the markup, one can judge the level of market monopolization. If the market is perfectly competitive, price and marginal cost will be equal, and the markup or monopolistic power will be zero. On the other hand, if the market is non-competitive, it is expected to have P > MC (where P is the price and MC is the marginal cost). If  P-MC > 0, it indicates the presence of monopolistic power. Since the markup is expressed as θ = (p-MC)/MC, by estimating θ, the Lerner index can be calculated. Furthermore, by calculating the elasticity of cost with respect to production, the return to scale can also be determined for large industries.
Findings and Discussion: In this study, the market power (monopoly power) in large-scale industries of Iran was measured based on two indices including the markup index and the Lerner index. The research findings indicate the existence of market power in these industries. For the average of these industries, the markup was estimated to be 5.22, and the Lerner index was estimated to be 0.839. Both indices not only confirmed the existence of market power in large industries but also emphasized the high level of market power. During the period under study, the highest value of the Lerner index was observed in 2009. Additionally, the study revealed that, on average, the large industries in Iran operate in the decreasing-cost region, which is supported by the increasing returns to scale (RTS =1.47). In other words, the average economies of scale were found to be Es = 0.47, indicating that not all the scale advantages have been fully utilized in these industries. There is a significant concentration in the industries of Iran, as only two industries out of seventy account for 43.3% of the total industry sales; each of these two industries has a share of more than ten percent. Furthermore, eleven industries have a share of more than 5% of the total industry sales, and these eleven industries together hold 82.3% of the total industry sales. All of these figures indicate the high level of concentration in the industrial sector of Iran.
Conclusions and policy implications: The research results indicate that the large industries in Iran are highly concentrated. The indices not only confirm the presence of market power (monopoly power) in these industries but also emphasize the significant level of this power. Among the seventy-four-digit ISIC (International Standard Industrial Classification) industries, ten two-digit industries were examined in this study. In the year 2019, the market power in sixty-two industries was higher than 0.9, and these industries accounted for 82% of the total industry sales. In other words, a substantial portion of the industrial sector is effectively controlled in a monopolistic manner.