Russia Growth Diagnostics (7): Market Structure and Competition

< Part 6: Taxation and Laws

Thirty years ago the entire Russian economy was managed by the state. Some estimates of the current state presence reach 50% of GDP, and this makes the current market structure a likely source of inefficiencies. Let’s see if it is.

Industrial Organization

Over the last 15 years, Russia transformed several state-owned industries according to a simple rule: take an industry and separate it into a natural monopoly and firms that will compete with each other. After the separation, the state retains control over the natural monopoly and privatizes the rest. This was done for electricity, railroads, utilities, and oil. Maybe not so competitive in details, newly created firms are separate business entities and have to think about profit.

The state retained control over certain industries. The Russian government is a monopolist in banking and gas production, although this doesn’t imply the textbook behavior with prices above and supply below competitive equilibrium. I already discussed banking in the post on finance and just restate here that the industry is open for new competitors, including foreign banks.

The third interesting part is the industries where the state consolidated assets, instead of privatizing them. The newly created “state corporations” manage state assets in the defense industry, nuclear energy, and hi-tech. They don’t have many competitors in these markets.

Regional economies may lack local competition. This includes company towns with a single major employer, former state enterprises that have been privatized by geographical clusters, and other peculiarities of an economy in transition.

Government procurement is the last suspect for distorted competition. Technically, it should be the most efficient market, where each pen is bought from an auction. In practice, this system involves collusions and incentives to spend more. Still, it’s difficult to separate trivial corruption from attempts to overcome formalism. Though the price isn’t the only criterion in procurement auctions, ex ante requirements to the bidders are incomplete and leave space for price dumping by incompetent firms. Is this procurement system a constraint in general? Yes, in the sense that private firms would be better at picking suppliers.

I haven’t discussed privately owned sectors, like retail and cellular, but they would benefit from the same things the state sector would. Namely, an independent and powerful agency that protects competition on the ongoing basis, not just at the moment when the state privatizes assets. Secondly, government price setting, including price ceilings for natural monopolies, is based on some arbitrary factors, rather than economic principles. Of course, government uses some ad-hoc models, but until these models remain secret, government pricing casts doubts.

Industrial Policy

By “industrial policy” I mean incentives for reallocating resources to productive industries. This smells anti-market sentiments, but it isn’t. Many markets have already been distorted (not just by government), and these distortions are costly. Hsieh and Klenow (2011) estimate a 50% productivity gain for China and India if these countries moved resources into more productive industries.

An overview of Russian productivity growth from Kaitila (2015):


The total factor productivity (TFP) depends on the economy-wide factors and allocation of inputs across firms. The economy-wide factors are all those things I discussed in the previous posts. Here I take on the distribution of inputs, mostly physical capital and labor.

McKinsey (2009) review productivity in Russia from a business perspective. Academic sources are listed in the table above, and I also recommend Bessonova (2007, in Russian). Most sources reach a similar conclusion: high dispersion of productivity within industries, which means that unproductive firms survive. In a hypothetical market economy, unproductive firms don’t live long before they lose capital and employees. Something keeps them afloat in Russia, and it retards TFP growth.

Variety, Complexity, and Innovations

This section is due to HRV’s discussion of product diversification in economic development. Hausmann and Hidalgo (2011) and Klinger and Lederman (2006) use trade data for tests. Trade data underestimates the diversification of the Russian economy because Russia is a big domestic market and its export mostly consists of commodities. Anyway, here’re the numbers:


The primary industries dominate export, but implications are unclear. First, there’re currency appreciation and other distortions caused by high commodity prices. Second, productivity of the entire economy may be insufficient to compete under current exchange rates. It means that developing new industries wouldn’t diversify export.

Does the economy need some domestic diversification? If the economy desperately needed some intermediate inputs, it would exhaust the trade surplus. But the trade balance is positive, and import consists mostly of consumer goods, not of important or innovative capital goods.

Overall, creating new productive industries is a good idea, but it’s called venture investing. And few investors are good at this trade.


Industrial policy and competition restrain growth. But they are the free lunch: an opportunity to get more output using the same inputs. Meanwhile, the inputs, capital and labor, won’t come to Russia in the nearest future. So this lunch is more desirable than policies aimed at investments and labor participation.

Twitter, Brevity, Innovation





Short messages earn most interactions
Short messages earn most interactions (Source)








How Google Works: Unauthorized Edition


Revenue: Auctions


In economic terms, auctions eliminate consumer surplus:








Retention: Monopoly





Development: Privileges









So What?



Amazon Monopoly Is Better than Free Market


Amazon’s monopoly in online retail got some attention recently. For years, Amazon restrains other online retailers with predatory pricing and covers its own losses with debt. The debt is cheap because the company enjoys a low-risk monopoly and can fix its profit margin anytime. But there’s no need to do so until lenders see this huge advantage.

That’s a bad thing about Amazon. A good thing about Amazon is that the company invests in new technologies and better service. Customers don’t have to stay 20 minutes on the line or worry about out-of-stock goods. Scale and scope of Amazon operations made this possible.

Online retail in Russia shows how the world without this kind of a monopolist looks like. Thousands of firms sell about the same stuff. Independent price search engines (of the kind Google tried to be) ensure competitive prices, hence, profit margins remain low. Low profit margins kill any chances for these small retailers to invest in service and inventories. Sellers economize on everything. In the end, customers buy stuff across dozens of shops with equally poor service and red tape, like entering all your personal information again and again.

An Amazon-type retailer isn’t emerging in Russia because the entry cost is already high and VC firms dislike investing in highly competitive markets. In turn, online retailers have no sources of capital to reach Amazon’s benefits of scale. “What about Walmart?” you may ask. It had emerged out of a competitive industry and became the largest company in the country.

It seems that Walmart appeared at the right moment. When Sam Walton opened his first shop, the United States invested heavily in new highways and railroads. Import of goods and interstate trade intensified. You need efficient logistics to keep prices down in this game. Walmart had it and became a monopolist in its segment. It entered international markets too late, as with Germany, and failed there.

Such technological revolutions rarely happen. But when they do—as with Walmart, Amazon, or Russian retailers—they shape the market for years. The sequence is important. You do want an Amazon-type monopolist to explore efficient practices in the beginning. Thousands of small firms don’t innovate like this, so low quality reigns the free market for years, which is a real loss. But after you have the monopolist that sets high standards, governments need to understand how to regulate it to revive competition.

How Competition Destroys Confidence









Answering questions already answered on Stack Exchange

In one of the previous posts, the relative distribution of upvotes on Stack Exchange showed that adding one more answer to a question isn’t much demanded by readers because readers give at least half of upvotes to the first-placed answer alone:

(y-axis: the answer’s mean fraction of upvotes in a question; x-axis is the position of the answer)

But the absolute number of upvotes tells why answers still appear:


Questions with few answers happen to be unpopular in general (that’s why they have fewer answer in the first place). You can barely notice upvotes for questions with a single answer. But they grow as the graph says. The last frame describes the case of 16 answers, but it’s better to be careful beyond that because the original sample has too few questions with many answers.

The bottom line is that answering a question with many answers may be more useful to users than answering questions with no answers at all. That’s at least valid under the assumption of unconditional expectations. Controlling for time is the next most useful thing to do to understand how demand and supply operate in Q&A markets and what can be done to make them more efficient.

Athletes vs. data scientists




(see appendix for how the datasets were constructed)
(Winning time for 100m. Source.)
(Restricted sample taken from

Username Public rank Private rank
Jared Huling 1 283
Yevgeniy 2 7
Attila Balogh 3 231
Abhishek 4 6
Issam Laradji 5 9
Ankush Shah 6 11
Grothendieck 7 50
Thakur Raj Anand 8 247
Manuel Días 9 316
Juventino 10 27



Appendix: The data for the first graph

This graph was constructed in the following way.

First, I took the data for major competitions:

  • Private leaderboard. Census competition on Kaggle. Link.
  • Private leaderboard. Merk competition on Kaggle. Link.