Growth Policy, Agglomeration, and (the Lack of) Competition

Wyatt J. Brooks, Joseph P. Kaboski, Yao Amber Li

NBER Working Paper No. 22947
Issued in December 2016, Revised in December 2016
NBER Program(s):Development Economics, Economic Fluctuations and Growth, Industrial Organization, Productivity, Innovation, and Entrepreneurship

Industrial clusters are promoted by policy and generally viewed as good for growth and development, but both clusters and policies may also enable non-competitive behavior. This paper studies the presence of non-competitive pricing in geographic industrial clusters. We develop, validate, and apply a novel test for collusive behavior. We derive the test from the solution to a partial cartel of perfectly colluding firms in an industry. Outside of a cartel, a firm's markup depends on its market share, but in the cartel, markups across firms converge and depend instead on the total market share of the cartel. Empirically, we validate the test using plants with common owners, and then test for collusion using data from Chinese manufacturing firms (1999-2009). We find strong evidence for non-competitive pricing within a subset of industrial clusters, and we find the level of non-competitive pricing is about four times higher in Chinese special economic zones than outside those zones.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w22947

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