Price Markups, Innovation, and Productivity:Evidence from Germany. Bertelsmann Stiftung July 2020.

Productivity is seen as a driving force behind economic growth and an indicator of a society’s material wellbeing. Over the past decades, however, many industrialized countries have experienced declining productivity growth and an expansion of the productivity differential. Possible explanations range from declining investment in R & D to structural changes to more services and increased measurement errors due to increasing digitalization. In this report, we study the role that a firm’s competitive environment plays for its own productivity development. Is an increase in industry concentration – and the expected decrease in competition – associated with lower productivity? And what is the underlying driving force of this effect? Our findings of relatively strong direct effects of price markups (in comparison to the innovation-centered indirect effects) in all sectors but services highlight the potential for a well-tailored competition policy approach in society’s effort to tackle the productivity slowdown. This is particularly true for the trade sector, where the effect of competition on R & D and innovation is of limited significance for the determination of firm-level productivity. For services, on the other hand, the interdependence of competition and innovation in their effect on productivity must be taken into account as the indirect effect partially offsets the direct effect of competition on productivity. Considering one without the other will be misguiding.