Volume 43, Number 170,
July-September 2012
Economic Competition in Mexico:
A Much Needed Debate
Rogelio Huerta

For Nickell, and of course Estrada – as he cites the former to support his approach – competition encourages productivity. If we ask from where does this concept arise, the first response would be the economic theory upon which they base their visions. If we go back to what the textbooks say, they state that in an ideal perfect competition market, equilibrium prices are such that the profit margin is zero. In stable equilibrium, companies produce the quantity of goods that equals the average cost to the marginal cost, which is equal to marginal income, which is equal to price, because in this type of market, given that the companies are not setting the prices, they can sell everything they produce at the same price (constant for the individual company), and it is determined by the market. In this market structure of perfect competition, the difference between price and production unit cost is cancelled out. There is no positive profit margin in the stable equilibrium among companies. From this theoretical perspective, as the number of competitors falls, the profit margin grows until there is just one producer (pure monopoly market) that earns monopolistic profits, and in this equilibrium market, the difference between monopoly price and average cost is at its maximum. Higher profits are earned in the monopolistic market, as the price-cost margin is at its greatest.

Nickell concludes that he can find empirical support in his results to maintain that greater competition increases company productivity-

First, I find that market power, indicated by market participation, brings about lower productivity. Secondly, and more importantly, I present that competition, whether measured by the increase in the number of competitors or for low profit levels, is associated with high total productivity growth rates for all factors. (1996: 741).

The above makes clear that competition intensity, which for the mentioned authors is a synonym for lower profit margin as added in the previous paragraph, that can be measured by a greater number of competitors in the market, encourages productivity because the lower the profits earned, or the lower the price-cost margin, the more businessmen are encouraged to be more productive in order to compete. In other words, according to this vision, competition plays out through productivity increases, as the companies do not set the prices. By not setting the prices, the companies have no other way to compete in the market (assuming a homogeneous good), besides new technologies and improving work processes, as this sets off cost reduction, and as a consequence, a higher profit margin.

From a different theoretical perspective, the non-static oligopoly theory, we can observe that companies develop their productive plans with the purpose of winning a greater market share and increasing profits. But by gaining greater market show, companies grow, and when companies get bigger, competition does not disappear. Two or a few companies can develop competition embodied by the market with different methods to reduce prices. If a company increases productivity, this can set off an increase in its production level, the company grows in size and can get a greater quantity of its goods to the market, and displace other companies if the market grows slowly or is stagnant. To achieve this displacement, market competition must be intensified. In other words, a company’s innovation to increase its productivity provokes increased market competition. By increasing their productive capacity and average productivity, companies obligate their sales and marketing departments to intensify their sales efforts, and as a result, to increase their competitiveness in the market. In the process of gaining greater market share, competition intensifies, although once these positions are obtained, competition may fall again, as in the previous section. Estrada cites a study Iscan (1998) did on the Mexican manufacturing industry, saying that: “in Mexico, it has been observed that competition in combination with commercial liberalization increases productivity (2010: 128). Although Iscan’s central hypothesis in this investigation does not explicitly address market competition and its influence on productivity, he does try to demonstrate that the liberalization of Mexico’s external sector, especially the import sector, had a positive effect on the productivity of Mexico’s manufacturing industry.

Iscan concurs with the hypothesis that the opening to external markets in Mexico after 1986 liberalized foreign trade, and that this contributed positively to the growth rate in levels of productivity for the domestic manufacturing industry. This productivity growth is significantly correlated with the participation of intermediate input imports for the products. Likewise, the reduction in the import tariff had a significantly positive effect on domestic levels of sector productivity. The cited research, which used a panel of 47 Mexican manufacturing sectors between 1970 and 1990, relates commerce and Mexican manufacturing productivity and identifies opening up to external markets with intensification of competition. Supposedly, then, opening to external markets encourages greater competition because all foreign companies that previously did nott compete due to domestic import tariffs are now in the game.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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