A linear-quadratic model to estimating market power in the Indonesian palm oil industry

Since it was first established as a large-scale operation in 1911, the Indonesian palm oil industry has undergone a number of structural changes. There have been allegations that some of these changes have led to a significant market power exertion in this industry. However, empirical evidence to support the allegation appears lacking. This paper seeks to make an attempt at modelling and measuring market power in the Indonesian palm oil industry. A dynamic adjustment model with open-loop and Markovian strategies is proposed to achieve this objective on the basis of annual data, covering the period 1969 to 2003. The model is assumed to be linear-quadratic. However, failing to meet the symmetry condition, only the open-loop model can be applied to this study. Some justifications for using the open-loop model are provided. As the estimation of market power indices do not appear to lie in the desired range, the results are inconclusive. A possible reason is proposed, but, in order to obtain a clear explanation, further research is required.

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 Record created 2017-04-01, last modified 2017-04-04

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