Microeconomic effects of competition on productivity in the EU

• Main Author: Vahter, Priit
• Published: University of Nottingham 2010
• Subjects: 338.6; HF Commerce
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.524106

Differences in the toughness of competition are likely to be one of the major determinants of the large dispersion in productivity, costs and output prices across firms even within narrowly defined sectors and geographical markets. This dissertation examines how increase in the intensity of international competition affects productivity and other performance measures: at the firm, industry, and geographical market levels. The dissertation combines three empirical studies of three distinct types of changes in the competition environment. The first empirical study investigates the effects of the changes in foreign competition in the form of entry of multinational firms on the total factor productivity growth, innovation and the ways of knowledge-sourcing by incumbent firms. The analysis is based on firm-level panel data from Estonia. I use an instrumental variables approach to identify the effects. Notably, I find no significant short-term effects on productivity growth of incumbents. However, I find that the entry of multinational firms is associated with increase in innovation activities of incumbents and knowledge sourcing from other firms. The second empirical study investigates the effects of entry and market structure on output price distribution across firms within spatially differentiated markets. Recent heterogeneous-producer models of competition and trade outline new effects how tougher competition affects across-firm price, productivity and cost distributions in the same sector and market. This chapter tests the implications of these models based on a case study of the European airline sector and a unique airfare dataset. I find some confirmation to the prediction that in more competitive environments, there will be less output price dispersion across firms. The third essay studies the effects of liberalisation and changes in entry costs on performance of the aviation sector. I use an event study of the enlargement of the European Union (EU) and the Single European Aviation Market in 2004 and employ difference-in-differences and synthetic control methods to study their effects on volume of airline passengers.