The Effectiveness of Competition Policy

Robert W. CrandallThe Brookings Institution

Lear ConferenceRome, Italy

25-26 June, 2009

To Paraphrase Shakespeare (and John Kwoka)

• “I come not to praise competition policy, nor to “attack” it… but to analyze it”

• In 2003, Cliff Winston and I offered the following thought:

“… we envision that economists may identify cases where antitrust policy has improved consumer welfare.”

• However, to quote Fred Jenny (28/03/08, Ankara):

“The economic literature contains little systematic analysis of overall effects of competition law enforcement”.

Buccirossi, et. al. ,“Competition Policy and Productivity Growth: An Empirical Assessment”

Addresses Jenny’s Lament

• Impressive piece of work that deserves careful reading

• Nevertheless, I have serious reservations about some aspects of the paper, including:– The choice of the dependent variable– The specification of the basic regression equation estimated with pooled

cross-section, annual time series data – The assumption that EU countries’ competition policy have effects only in

their own countries– The measurement of R&D – The lack of a variable to capture cyclical influences– The limited breadth of the industries in which competition policy has a

significant effect– The lack of any significant effects of competition policy in service

industries

Empirical Method

• Authors use pooled cross-section, time-series regressions with fixed effects on annual industry-level data.

• TFP growth in year t is related to measures of Human Capital, R&D Intensity, Import Penetration, the “Technology Gap”, Product-Market Regulation, and the Competition Policy Indexes (CPIs) in year t-1(with the exception of the Product Market Regulation variable).

• But year-to-year TFP growth is quite volatile and is heavily affected by the business cycle, yet there is no industry-specific cyclical variable in the equation(s).

• Because of this cyclical volatility, most analyses of TFP growth look at longer-term trends, not year-to-year variations.

The Choice of Dependent Variable: Why TFP?

The effect of competition policy should be registered in increases in output in non-competitive industries; reductions elsewhere

• The authors settle on TFP (total factor productivity), suggesting that competition policy increases innovation and productive efficiency.

• However, competition policy could have major effects on allocative efficiency without having much effect on TFP.

If competition policy has a beneficial effect in certain industries, that effect should be reflected in higher output growth. Why not see if the Competition Policy Indexes (CPIs) affect output growth in these industries?

Alternatively, the authors could examine the effect of the CPIs on economic growth in the spirit of Dutz and Hayri (1999).

Cross-Country Evidence on Trends in TFP

• The current study focuses on 1995-2004 and uses data from the nine EU countries, the United States, Canada and Japan

• van Ark, et.al. (2008), using much of the same data as in the current study, have shown that between 1980-95 and 1995-2004:

– TFP in the European Union declined dramatically from 0.9% per year to just 0.3% per year

– But TFP in the United States nearly trebled from 0.5% per year to 1.4% per year.

– Labor productivity growth in market services rose from 1.5% to 3.2% per year in the U.S., but fell from 1.6% to 0.9% per year in the EU and 0.9% per year in the EU

– Market services were responsible for 60% of the growth in U.S. labor productivity over this period

The Competition Policy Variables

• Extremely detailed attempt to capture the differences in the policy environment across countries

• Too complicated to discuss in detail here, but I note that the “Institutional” and “Enforcement” Indexes reflect the underlying policy structure, not its execution

• For instance, the average attendee at this conference would be surprised to find that the Competition Policy Index (CPI) for the U.S. fell slightly during the second Clinton term, but rose somewhat during the first (George W.) Bush term!

• The CPI’s tell us nothing about the intensity of antitrust enforcement nor whether it is effectively targeted on anti-competitive practices

Competition Policy Indexes – North America and Japan

Competition Policy Indexes -- Large EU Countries

Competition Policy Indexes -- Small EU Countries

Major Changes in CPI’s Drive the Empirical Results

• I show the charts for the aggregate CPIs because it appears that changes in the CPIs in a few countries drive the empirical results, given the inclusion of country-industry dummy variables.

• With one exception – the United Kingdom beginning in 1999 – the largest changes occur in small EU countries.

• Note large increases in:– Czech Republic, beginning in 1995– Hungary, beginning in 1999– Netherlands, beginning in 2000

• More modest increases in Spain and France circa 2000

• Note that increases in EU countries’ CPIs occurs at a time when EU is falling behind U.S. in TFP growth.

Further Problems with the Model

• Effects of CPIs are limited to industries in the Competition Authorities’ own countries despite the fact that 9 of the 12 countries are in the EU. The effects of competition policy in each EU country surely extend to the entire EU, or at least to a large subset of EU countries.

• Moreover, it is very difficult to believe that any change in the CPI would affect TFP with just a one-year lag

• R&D variable is measured by annual R&D spending divided by value added in the given industry rather than the stock of R&D capital.

• Nevertheless, the R&D variable is statistically significant when used, probably because it is picking up cyclical influences on TFP growth, but it is then dropped from all subsequent equations. Why?

• No overall goodness-of-fit statistics reported. What share of variance in TFP is explained by the model?

Significant Effects of CPIs Are Confined to a Few Industries, Reflecting a Very Small Share of GDP

Industries with significant coefficients (share of 2007 U.S. GDP):

• Agriculture, forestry, and fishing – (1.2%)• Food processing -- (1.3%) • Paper, printing, and publishing -- (0.7%)• Petroleum and coal products -- (0.5%)• Rubber products -- (0.5%)• Non-metallic mineral products -- (0.4%)• Machinery -- (0.9%)• Furniture -- (0.3%)

Total with significant effects 5.8%

Industries with insignificant coefficients: Professional and Business Services (12.2%); Finance (7.9%); Construction (4.4%);Transport and Storage (2.9%); Communications (3.2%); Hotels and Restaurants (2.7%);Electricity, Gas & Water (2.0%)

Omitted:Real Estate (12.5%); Wholesale and Retail Distribution (12.3%); Education and Health

Care (7.9%)

Any Corroborating Evidence in these Industries of Increasing Competition?

• Food processing?• Paper and printing?• Petroleum refining?• Nonmetallic minerals (cement, etc.)? • Machinery?• Rubber products (tires)?• Furniture?

• If Competition Policy is effective in these industries, there should be some other evidence of entry, reductions in dominant positions, successful attacks on price-fixing conspiracies, etc.

In These Industries, U.S. TFP Growth Exhibits Enormous Volatility, Even Over 5-Year Periods

(Average Annual % Growth)

1995-2000 2000-2006

Industry

Pulp & Paper 1.2 2.3

Converted Paper Products -0.2 -0.3

Printing -1.5 0.2

Petroleum Refining 1.9 0

Rubber Products 0.9 -0.2

Clay Products 0.3 -1.5

Glass and Glass Products 1.7 -0.5

Cement and Concrete Products 0 -0.7

Industrial Machinery -0.4 0.3

Metalworking Machinery -0.9 1.9

Computer Equipment 25.3 21

Semiconductors & Electronic Components 22.7 8.1

Electronic Instruments -3.2 1.6

Household Furniture -0.7 0.7

Office Furniture & Fixtures 1.7 0.9

An Alternative Test: The Effects of Competition Policy on Overall Economic Growth

• As I mentioned earlier, the authors could test the effect of the CPIs on economic growth in the spirit of Dutz and Hayri (1999).

• GDP growth in the EU has consistently lagged behind the U.S. by about 25 percent since the mid 1980s in large part because of less investment in ICT.

• Since 1999, the average CPI in the nine EU countries in the sample has risen relative to the CPI for the U.S.

• Although there is no evidence that EU growth has accelerated relative to U.S. growth since 1999, is it possible that – after taking into account the other (exogenous) determinants of growth – the increase in the EU CPIs has favorably affected EU growth?

Concluding Observations

• Buccirossi, et. al. , have given us a provocative paper that concludes that Competition Policy, as they measure it, has virtually immediate effects on productive efficiency.

• These effects apparently occur in a few EU countries and across only a few manufacturing industries, not in service industries.

• These results contrast with, but do not necessarily contradict, another analysis of the same data (van Ark, et. al. 2008) which finds that the EU lagged badly behind the U.S. in TFP growth in the same 1995-2004 period

• The results of this study might change substantially if the R&D variable were properly constructed and used in the all of the relevant regression equations and if cyclical variables were included in the regressions

• Such changes might induce the authors to investigate the effects of more plausible lags in the effect of their CPIs on TFP, labor productivity, or economic growth