Working Paper: NBER ID: w21994
Authors: Jan De Loecker; Johannes Van Biesebroeck
Abstract: We propose a framework to evaluate the potential impact of international competition on firm performance and highlight two points. First, it is important to consider effects on productive efficiency and market power in an integrated framework. The popular concept of (revenue) TFP combines both effects which can lead to problems of estimation and interpretation. Second, greater international competition enlarges the relevant market and can affect both the number and the type of competitors a firm faces, as well as the nature of competition. While it is possible that firms respond by adjusting their production operations, pricing adjustments are all but guaranteed. We contrast three estimation approaches that start, respectively, from the demand side, the product extensive margin, and the production side. We conclude with a few avenues for future research.
Keywords: International Competition; Firm Productivity; Market Power
JEL Codes: F10; L1; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international competition (F53) | firm performance (L25) |
| international competition (F53) | productive efficiency (D24) |
| international competition (F53) | market power (L11) |
| trade liberalization (F13) | average productivity (O49) |
| trade liberalization (F13) | minimum productivity threshold for survival (D24) |
| minimum productivity threshold for survival (D24) | resource reallocation (Q20) |
| international competition (F53) | price-cost margins (D40) |
| competition (L13) | pricing strategies (D49) |
| degree of product differentiation (L15) | impact of competition (L13) |
| initial market power (D42) | impact of competition (L13) |