Competition and productivity: a review of evidence

Does competition spur productivity? And if so, how does it do so? These have long been regarded as central questions in economics. This essay reviews the literature that makes progress toward answering both questions.Competition ; Monopolies ; Productivity

Competition at work : railroads vs. monopoly in the U.S. shipping industry

This study primarily establishes two things: (1) that monopoly has been pervasive in the U.S. water transportation industry in both the 19th and 20th centuries and has led to prices above competitive levels and the adoption of inefficient technologies and (2) that the competition of railroads has greatly weakened this monopolistic tendency, leading to lower water transport prices and fewer inefficient technologies. The study establishes these points using standard economic theory and extensive historical U.S. data on the behavior of unions and shipping companies. These gains from competition have been ignored by researchers studying the contribution of railroads to U.S. economic growth. Researchers have assumed that if railroads had not been developed, the long-distance transportation industry would have been competitive. This study shows that it would not have been. The quantitative estimates of previous studies thus are likely to have significantly understated the gains from the development of railroads.Transportation ; Monopolies

Resistance to new technology and trade between areas

Historically, competition, or the extension of markets, has repeatedly brought tremendous increases in wealth. However, there is still plenty of uncertainty among economists as to why that is so. This article develops a model in which competition, modeled as the movement of goods between two areas, reduces resistance to new technology and, hence, leads to increased technology adoption and wealth. Here, the extension of markets leads to wealth increases because it reduces activities that block the use of new, more productive technology.Free trade ; Technology

Monopoly and the incentive to innovate when adoption involves switchover disruptions

When considering the incentive of a monopolist to adopt an innovation, the textbook model assumes that it can instantaneously and seamlessly introduce the new technology. In fact, firms often face major problems in integrating new technologies. In some cases, firms have to (temporarily) produce at levels substantially below capacity upon adoption. We call such phenomena switchover disruptions, and present extensive evidence on them. If firms face switchover disruptions, then they may temporarily lose some unit sales upon adoption. If the firm loses unit sales, then a cost of adoption is the foregone rents on the sales of those units. Hence, greater market power will mean higher prices on those lost units of output, and hence a reduced incentive to innovate. We introduce switchover disruptions into some standard models in the literature, show they can overturn some famous results, and then show they can help explain evidence that firms in more competitive environments are more likely to adopt technologies and increase productivity.

A gain from trade: more research, less obstruction

There is an old wisdom that reductions in tariffs force changes on producers that lead to costless, or nearly so, increases in productivity. We construct a technology-ladder model that captures this wisdom. As in other technology-ladder models, time spent in research helps propel an industry up a technology-ladder. In contrast to the literature, we include another activity that plays a role in determining an industry's position on the technology-ladder: attempts to obstruct the research program of rivals (through regulations, for example). In this world, reductions in tariffs between countries lead producers to spend more time in research and less in obstruction of rivals.Tariff ; Research and development ; Productivity