Why Antitrust Policies Matter More Than Trade Liberalization

ANALYZING MORE THAN 10MLN COMPANIES IN 90 COUNTRIES, NICOLA LIMODIO FINDS THAT INTERNATIONAL COMPETITION AFFECTS ONLY 20% OF THE FIRMS. FOR THE REMAINING 80%, MARKET REGULATION CAN BE AN EFFECTIVE WAY TO AVOID MARKET POWER ABUSES

Trade liberalization is not enough to provide the economy with the benefits of competition. A good measure of antitrust policy is even more necessary according to a study, forthcoming in the American Economic Review: Insights, co-authored by Nicola Limodio, Assistant Professor at Bocconi Department of Finance. Trade liberalization affects only about 20% of the firms, those operating in the so-called tradable goods. “Four firms out of five operate in non-tradable goods and the effective way to curb market power abuses in these industries is rigorous antitrust policy,” says Professor Limodio.
 
The authors use firm-level data covering more than 10mln firms in 90+ countries for ten years and measure antitrust policies in different countries via a publicly available index developed by law scholars. They find that, on average, profit margins in non-tradable sectors, at 7.58%, are higher than margins in industries exposed to international competition (5.18%).
 
Strengthening antitrust policies, though, lowers profit margins in non-tradable industries more than in tradable sectors. “The results are economically meaningful,” Prof. Limodio says, “suggesting, for example, that if China adopted France’s antitrust policies, we would expect a 19% fall in the average profit margin.”
 
Authors also find that market concentration is lower in non-tradable sectors when antitrust policy is strong. In contrast, changes in antitrust are associated with negligible effects on tradable sectors, in line with the hypothesis that international markets already discipline firms in such sectors.
 
For tradable goods, exposure to import competition serves as a restraining mechanism for firms, leading to lower profit margins. However, for non-tradable goods what firms do depends on governments’ competition policies. This is important since there is little scope for international competition to improve the behavior of 80% of firms.
 
The results of the study confirm the role of a good institutional environment in boosting growth and single out market regulation as the key mechanism in sectors unaffected by international competition. “Other measures of good institutions,” Prof. Limodio concludes, “do not appear correlated with profitability in the non-tradable sectors of the economy.”
 
Timothy Besley, Nicola Fontana, Nicola Limodio, “Antitrust Policies and Profitability in Non-Tradable Sectors”, forthcoming in American Economic Review: Insights.

by Fabio Todesco