Beyond the Great Reversal: Superstars, Unions, and the Euro

Abstract

How does the interaction between supranational and domestic institutions affect competition? We answer this question by investigating how the Euro has radically changed the rules of the competition game between firms. Using a staggered difference-in-differences design, we find that the Euro, as a supranational institution, has increased firm-level market power between 23 and 30 percent after its adoption. Deepening economic integration creates a stronger competitive environment where superstar firms acquire a dominant position. Consistent with this explanation, the Euro effect on market power is between 8 and 9 percent larger for tradable industries and 10 and 17 percent larger for firms in the top percent of the Eurozone pre-Euro productivity distribution. This rise in market power is mainly driven by changes in labor market power (i.e., lower markdowns) that more than compensate for the increase in product market competition (i.e., lower markups). Counterintuitively, we also find that unions, under certain conditions, can increase the market power of superstar firms. This happens in the presence of domestic cooperation-enhancing institutions that favor agreements between labor and capital and raise firms’ competitiveness by diminishing markdowns. Successful labor-capital cooperation positively impacts workers’ attitudes toward further European integration. Our findings contribute to the debate over the rise of global market power by embedding this phenomenon into an institutional framework, creating an inherently European version of the superstar hypothesis.

Keywords: Competition, Single Currency, Superstar Firms, Market power, Labor Market Institutions.

JEL Classification: D41, D41, D42, D43, E02, J42, L1