Modeling the effect of competition on US manufacturing sectors’ efficiency: an order-m frontier analysis

Abstract

The study applies the probabilistic framework of nonparametric frontier estimation to model the effect of competitive conditions on sectors’ production efficiency levels. We utilize conditional order-m robust frontiers to model the dynamic effects of competition on a sample of U.S. manufacturing sectors over the period 1958–2009. Contrary to the existing studies, we apply for the first time in the Industrial Organization literature the latest advances of robust nonparametric frontier analysis to disentagle the dynamic effects alongside the effects of competition on sectors’ productive efficiency levels. The results derived from the time-dependent robust conditional estimators unveil a non-linear relationship between product market competition and productive efficiency. Our findings suggest that for higher competition levels the effect is positive up to a certain threshold after which the effect becomes negative.