Wyatt J. Brooks, Joseph Kaboski, Yao Amber Li

Industrial clusters are promoted by policy and generally viewed as good for growth and development, but both clusters and policies may also enable non- competitive behavior. This paper studies the presence of non-competitive pricing in geographic industrial clusters. We develop, validate, and apply a novel test for collusive behavior. We derive the test from the solution to a partial cartel of perfectly colluding firms in an industry. Outside of a cartel, a firm’s markup depends on its market share, but in the cartel, markups across firms converge and depend instead on the total market share of the cartel. Empirically, we validate the test using plants with common owners, and then test for collusion using data from Chinese manufacturing firms (1999-2009). We find strong evidence for non-competitive pricing within a subset of industrial clusters, and we find the level of non-competitive pricing is about four times higher in Chinese special economic zones than outside those zones.

JEL Codes  
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
O10: Economic Development: General
O25: Industrial Policy
R11: Regional Economic Activity: Growth, Development, Environmental Issues, and Changes