A Quantitative Analysis of Market Competition and Productivity

Makoto Funakoshi and Kazuyuki Motohashi

Japanese Economy, 2009, vol. 36, issue 1, 27-47

Abstract: To help further develop and expand the national economy as well as to ensure the interests of consumers in general, a competition policy is needed that promotes free and fair competition to encourage the business activities of firms. In particular, many early studies demonstrate that market competition raises firms' productivity. However, reverse results drawn from the perspective of competition indicate that further research in this field is needed.Empirical studies of industrial organizations have traditionally been based on the structure-conduct-performance (SCP) theory, and profit rates have been used as a performance index. Moreover, the concentration ratio and the Herfindahl-Hirschman index (HHI) have been used as competition indicators.In this research, we estimate the Cobb-Douglas production functions of companies and analyze the effect of competition on growth of total factor productivity (TFP). The main result is as follows.In the analysis of the system-generalized method of moments (sysGMM), which solves the endogeneity problem, market competition (lower HHI) was associated with higher TFP for firms in Japan. We believe that this analysis can contribute significantly to improving current Japanese competition policy

Date: 2009
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DOI: 10.2753/JES1097-203X360102

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