Économie et Statistique n° 419-420 - 2008Productivity, Institutions and Economic Policy
Does Competition Promote Productivity Gains? An Analysis by Sector in OECD Countries
To what extent do differences in competition intensity between economic sectors explain international differences in hourly labour productivity gains at sector level? We conducted a study of sectors in a set of OECD countries and assessed the degree of competition using econometrically estimated markups. Our results indicate a non-linear relationship between competition and labour productivity gains. Increased competition would benefit productivity growth in low-competition sectors, but would be detrimental above a certain level. This negative effect, however, seems fragile: when we restrict the analysis sample to the most competitive sectors, we find no significant effect of the degree of competition on productivity. In sum, greater competition appears to raise productivity in low-competition sectors but to have no impact on the most competitive ones. The effect of competition on productivity gains differs from one sector to another. In the manufacturing sectors—typically characterized by relatively high competition and sunk costs—more intense competition would slow productivity gains. As the European Commission suggests (Roeger et al., 2008), margins need to reach a certain level in order to stimulate innovation in these sectors. By contrast, in services, where sunk costs are lower and competition relatively weak on average, greater competition would seem to consistently promote productivity gains. This analysis should be supplemented by an in-depth study of the role of research and development and, more generally, of sunk costs. This would provide a better understanding of the reasons for the contrast between services and manufacturing sectors in regard to the relationship between competition and productivity gains.