Agglomeration, Misallocation, and (the Lack of) Competition†

Industrial agglomeration policies may limit competition. We develop, validate, and apply a novel approach for measuring competition based on the comovement of markups and market shares among firms in the same location and industry. Then we develop a model of how this reduction in competition affects aggregate income. We apply our approach to the well-known special economic zones (SEZs) of China. We estimate that firms in SEZs exhibit cooperative pricing almost three times as intensively as firms outside SEZs. Nevertheless, we model the aggregate consequences of SEZs and find positive effects because markups become higher but also more equal.