Product Competition and Firm Overcapacity: Evidence from China

We exploit the competition policy in China to test whether product competition affects firm's overcapacity. By introducing the shock of enacting of the Chinese Anti-Monopoly Law, our difference-in-differences estimation shows that the overcapacity of firms with larger market power has a significant decrease. The possible explanations are that the product competitions significantly increase after the monopoly activities and local protectionism are prohibited, which lead to the reduction of zombie firms, and the decline of firms' bank loans and over-investment inefficiency. The effects are more pronounced to stated-owned firms, political connected firms, firms in cities with lower regional marketization and firms under industries with less competition. Overall, this study provides timely policy implications for central regulators concerned with the outcomes of the enforcement for the anti-monopoly policy and the solutions for the overcapacity problems.

Automated summary

This study examines the influence of product competition on firms' overcapacity by exploiting the competition policy in China. The difference-in-differences estimation suggests that firms with greater market power experience a significant decrease in overcapacity after the enactment of the Chinese Anti-Monopoly Law. Possible explanations include the significant increase in product competition following the prohibition of monopoly activities and local protectionism, leading to a reduction in zombie firms, as well as a decline in firms' bank loans and over-investment inefficiency. These effects are more pronounced for state-owned firms, politically connected firms, firms located in cities with lower regional marketization, and firms operating in industries with less competition. Overall, this study provides timely policy implications for central regulators concerned with the enforcement outcomes of anti-monopoly policies and solutions to address overcapacity problems.