Competition, Technological Change and Productivity Gains: A European Sectoral Analysis

Abstract

We show that the relationship between the level of competition (the price markup) and the growth of labor productivity in 28 sectors of a panel of 8 euro area countries between 1995 and 2018 is consistent with an inverted U-shaped curve. We calculate an optimal price markup that maximizes productivity growth in each sector and show that sectors with the highest rates of technical progress are the ones that maximize their growth of productivity at the lowest levels of competition (the higher price markup). For the European panel of sectors, during this period, the average loss in productivity growth attributable to deviations from their optimal levels of competition was 0.31. From a policy perspective, public authorities should aim to enable optimal price markups, particularly in high-innovation sectors, to reap the most benefits from their potential for productivity.

Keywords: Technical progress, technological change and productivity gains: a European sectoral analysis