Effect of International Competition on Firm Productivity and Market Power

Abstract This chapter proposes a framework to evaluate the potential impact of international competition on firm performance and highlights two points. First, it is important to consider effects on productive efficiency and market power in an integrated framework. The popular concept of (revenue) total factor productivity (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. The chapter contrasts three estimation approaches that start, respectively, from the demand side, the product extensive margin, and the production side. It concludes with a few avenues for future research.