Industry Competition and Total Factor Productivity Growth

This paper analyzes the impact of changes in the competitive market structure on an industry's total factor productivity (TFP) growth. The impact of horizontal mergers on TFP growth is of particular interest. The number of proposed horizontal mergers among U.S. firms totaled 28,818 from 1996 to 2005, while the number of U.S. Department of Justice investigations of proposed mergers totaled 1,303 during the same time period. The impact of mergers upon total factor productivity growth is rightly a topic for consideration. Merger participants routinely claim that mergers will result in welfare improving efficiency gains. If true, these gains should translate into increased TFP growth. This paper estimates this effect and others after presenting a model of TFP growth as a function of changes in the competitive market structure of an industry, changes in production diversification measured at the establishment level, and changes in output per establishment and the number of establishments. Mergers are found to have a positive impact upon TFP growth, accounting for 0.36 percentage points of total factor productivity growth between census years.