The Impact of Competition on Productivity. Theory and Evidence

This paper reviews the theoretical and empirical literature on the impact of competition on firms’ efficiency and productivity. Looking at the effects of changes in competition overtime or analysing the relationship between competition and productivity across many product markets, a large body of empirical studies finds evidence of a positive relationship between competition and productivity, greater competition on the market leading to higher levels of productivity. On the other hand, the relationship between competition and innovation is highly debated, evidence suggesting a non-linear relationship with both very high and very low degree of competition discouraging firms from innovating.