Competition and productivity: Do commonly used metrics suggest a relationship?

More competition 
to lift productivity  
(Where) can we see that?  

jess watters 483666 unsplash2We demonstrate the power of recently redeveloped productivity microdata to produce a range of meaningful competition indicators highlighting different aspects of industry competitiveness. Combining these competition metrics into composite indicators, we summarise the diverse range of competitive environments in New Zealand by clustering industries into four distinct groups. Estimating the relationship between competition and productivity within these groups provides some suggestive results that the tail of unproductive firms may be truncated when competition is greater, in part due to greater selection-to-exit based on productivity. Overall, the limited evidence we find for a direct relationship between competition and productivity does not necessarily imply that the two are unrelated, but more likely reflects that changes in competition in New Zealand over the sample period have not been particularly pronounced, making it difficult to identify a systematic relationship.

This research highlights different aspects of competition within industries in New Zealand. It draws on a redeveloped firm-level productivity dataset (Maré & Fabling, 2019b) and forms the basis for a summary report and web-based data visualisation tool (competition explorer) (Schiff & Singh, 2019). A Cut to the Chase from the Productivity Commission of New Zealand explains why these agencies undertook this work and some of the key messages that emerged.

Funders

Productivity Hub, Ministry of Business, Innovation and Employment, Productivity Commission of New Zealand, The Treasury, Statistics New Zealand