EVIDENCE ON STRUCTURE CONDUCT PERFORMANCE PARADIGM IN THE INDONESIAN BOTTLED WATER INDUSTRY: A LONGITUDINAL CASE STUDY

Abstract

Bottled water has become popular due to its quality and affordability. The industry's homogeneity encourages competition, leading to various business behaviors. This study analyzes the bottled water industry in Indonesia, focusing on market structure, conduct, and performance, as well as the relationship between these factors and internal efficiency. Using fixed-effects (within) IV regression and large and medium manufacturing industry survey data, this study found a simultaneous relationship between market concentration, internal efficiency, and price-cost margin, with all SCP variables significantly affecting each other. The results show that market concentration, internal efficiency, and market growth positively and significantly affect price-cost margins. The four-firm concentration ratio has fluctuated with a downward trend over time. Due to changing laws and regulations, the bottled water market structure shifted from a tight oligopoly to a loose oligopoly between 1990 and 2005, and then to effective competition from 2006 to 2014. The findings support the quiet-life hypothesis and the efficient-structure hypothesis, which suggest that firms with significant market power that exist in a highly concentrated market will quietly generate high profits with no pressure or incentive to improve efficiency, whereas a firm with a low-cost structure can increase profits by lowering prices and increasing market share.