Competition, Innovation, and the Number of Firms

Pedro Bento

No 20160608-001, Working Papers from Texas A&M University, Department of Economics

Abstract: I look at manufacturing firms across countries and over time, and find that barriers to competition actually increase the number of firms. This finding contradicts a central feature of all current models of endogenous markups and free entry, that higher barriers should reduce competition and firm entry, thereby increasing markups. To rationalize this finding, I extend a standard model in two ways. First, I allow for multi-product firms. Second, I model barriers as increasing the cost of entering a product market, rather than the cost of forming a firm. Higher barriers to competition reduce the number of products per firm and per market, but increase markups and the total number of firms. Calibrating the model to U.S. data, I estimate cross-country differences in consumption as large as 3-fold due to observed differences in barriers to competition. In addition, increasing barriers generates either a negative or inverted-U relationship between firm-level innovation and markups. While higher markups encourage product-level innovation through the usual Schumpeterian mechanism, firm-level innovation (at least eventually) drops as firms reduce their number of products. I provide new evidence supporting these two novel implications of the model - that product-level innovation increases with barriers to competition, while the number of products per firm decreases.

Keywords: product market regulation; entry costs; firm size; productivity; innovation; markups; competition; multi-product firms (search for similar items in EconPapers)
JEL-codes: L1 L5 O1 O3 O4 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2016-06-08
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-ind, nep-ino and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Competition, Innovation, and the Number of Firms (2020)
Working Paper: Competition, Innovation, and the Number of Firms (2016)
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