IMF Working Papers

The Middle East (ME) is often perceived as region with rentier economies and uncompetitive markets. Evidence of market power in the region however is scant. In this paper, we ask the following three questions: Is the ME uniquely uncompetitive? Has the evolution of market power in the region traced the global rise in market power? What government policies and actions influenced the market power in the region and can taxes be a way to even the playing field? To answer these questions, we utilize comprehensive firm-level data from Compustat between 2004 and 2022 and employ two methods for estimating markups (production function and cost-share approach). We document that market power among listed firms in the ME is higher than in the US, but on a downward trend. We find that the value-added tax (VAT) reforms introduced by some Gulf states from 2018 to 2022 resulted in a reduction of market power, an additional benefit beyond increasing fiscal space. While policymakers should continue to use available regulatory levers to achieve economic efficiency and a level playing field, VAT could be considered as an alternative instrument.