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Estimating the degree of firms’ input market power via data envelopment analysis: Evidence from the global biotechnology and pharmaceutical industry

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  • Fukuyama, Hirofumi
  • Matousek, Roman
  • Tzeremes, Nickolaos G.

Abstract

This study estimates input market power by introducing an input-market-based Lerner index based on data envelopment analysis (DEA). This index is an extension to the DEA-based Lerner index. In doing so, we develop a revenue function, which is based on minimum distance framework. DEA based-Lerner indexes are commonly based on efficiency measures aiming at finding the “farthest” strongly efficient point. However, if firms operate in non-optimal scales, then such a methodological treatment can be restrictive. In our case, we adopt the minimum distance. We utilize a strongly revenue-efficient frontier and model a DEA based Lerner index which is less restrictive. We apply our index to a sample of global biotechnology and pharmaceutical (B&P) firms over the period 2015–2019. We further investigate the effect of firms’ research and development (R&D) on firms’ market power estimated by the input-market DEA-based Lerner indexes. Our findings suggest that the investment on R&D has a nonlinear effect on firms’ market power. Finally, our finding suggest that the positive effect of R&D is more pronounced on the estimated firms’ employees-based market power compared to the asset-based market power index.

Suggested Citation

  • Fukuyama, Hirofumi & Matousek, Roman & Tzeremes, Nickolaos G., 2023. "Estimating the degree of firms’ input market power via data envelopment analysis: Evidence from the global biotechnology and pharmaceutical industry," European Journal of Operational Research, Elsevier, vol. 305(2), pages 946-960.
    • Handle: RePEc:eee:ejores:v:305:y:2023:i:2:p:946-960
    DOI: 10.1016/j.ejor.2022.06.023
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