Agglomeration, Misallocation, and (the Lack of) Competition

Industrial agglomeration policies may limit competition. This study develops, validates, and applies a novel approach for measuring competition based on the comovement of markups and market shares among firms in the same location and industry. Then this study develops a model of how this reduction in competition affects aggregate income. In this paper, the authors apply their approach to the well-known special economic zones (SEZs) of China. This paper estimates that firms in SEZs exhibit cooperative pricing almost three times as intensively as firms outside SEZs. Nevertheless, this paper models the aggregate consequences of SEZs and find positive effects because markups become higher but also more equal.