Market segmentation leads to overestimation of productivity misallocation

The standard economic approach infers misallocation of production inputs from the dispersion in revenue productivity among firms within the same industry.

This paper challenges that assumption, arguing that such dispersion is not necessarily a sign of misallocation when it stems from firms operating in distinct markets.

The core argument is that reallocating resources across different markets, even within the same industry, merely shifts utility between consumer groups rather than achieving a Pareto improvement in efficiency.

This implies that such resource movements represent a shift along the Pareto-efficient frontier, not an enhancement of overall efficiency.

The study quantifies this effect using detailed data from the ready-mixed concrete industry in Korea, a sector characterized by clear geographic market segmentation due to product characteristics.

This empirical setting provides an ideal case study to differentiate between within-market and across-market productivity dispersion.

The research demonstrates that industry-level measures significantly overstate the actual degree of misallocation.

The study finds that these traditional measures overestimate misallocation by a substantial margin of 27 to 36 percentage points.

This conclusion stems from decomposing total industry-wide revenue productivity (TFPR) dispersion into within-market and across-market components.

The across-market component accounts for 42 percent of the total industry-wide dispersion.

After controlling for sampling noise, 18 percent of this across-market dispersion is attributed to genuine market-specific wedges.

While the industry-based approach suggests a misallocation degree of 63 percent, the market-based approach yields a significantly lower range of 27 to 36 percent, highlighting the impact of market segmentation on efficiency assessments.