Today, Statistics Canada has released a study on competition intensity and it's effect on labour productivity growth. 

Canada's economy has experienced weak labour productivity growth over the past two decades, impacting living standards and long-term economic growth. One factor that has attracted attention is competition, as it is widely viewed as an important driver of productivity. In the study "The Impact of Competition Intensity on Labour Productivity Growth in Canada", detailed microdata covering nearly all Canadian firms from 2000 to 2019 is used to examine the relationship between competition and labour productivity growth.  Competition is measured in three complementary ways in this study: the Price-Cost Margin for pricing power, the Boone Indicator for how profits respond to firm efficiency, and the Herfindahl-Hirschman Index for market concentration. 

The Herfindahl-Hirschman Index (HHI) measures market concentration based on the market share of firms in the industry. The HHI ranges from 0 to 1, with 0 indicating perfect competition (many firms with low market shares), and 1 indicating a monopoly (one firm with 100% market share). An HHI above 0.25 is generally considered a highly concentrated market. The Price-Cost Margin (PCM) measures the market power of firms in an industry by measuring the extent to which firms can charge a price above their marginal cost. Similar to the HHI, a value of 0 indicates perfect competition, while a value of 1 is the theoretical maximum, typically not observed since it implies zero cost, but taken to represent a perfect monopoly. Unlike the HHI there is no standard threshold PCM value indicating excessive market power. The Boone indicator measures how responsive firm profits are to marginal costs. If an industry's profits are driven more by controlling costs rather than the ability to demand a higher price, the more sensitive firm profits are to changes in marginal cost the more competitive the industry is expected to be. Industry-level labour productivity in this analysis is taken as the log ratio of aggregate real value added and aggregate hours for firms in the industry. 

The combination of the three competition indicators provides an overview of competition in Canada, as well as highlighting the necessity of using multiple, complementary indicators. The average annual HHI for all industries has remained relatively constant over the 2000 to 2019 study period, which would indicate that Canda's industries are not becoming more concentrated overtime. However, the HHI may mask offsetting dynamics, such as growing dominance by a few incumbent firms, offset by the entry of smaller competitors, resulting in a stable index. When examining the all-industry results for the PCM, the data shows a clear upward trend, signalling that firms have gained more market power over time in Canada. The Boone indicator has also increased, indicating that the rising margins captured by the PCM metric are not the result of improved efficiency, but more likely reflect the increasing ability of firms to sustain higher profits through pricing power. 

Through the study's analysis, the PCM and Boone indicator were found to be positively associated with labour productivity growth at the industry, and especially the firm level. This relationship was not non-linear, indicating that overall higher values of these indicators (lower competition) results in a negative effect on labour productivity growth. HHI-based results pointed to a more nuanced association between labour productivity growth and firm concentration in an industry. Labour productivity growth was found to be low at both low and high levels of firm concentration, indicating a non-linear relationship between concentration and labour productivity growth. The paper suggests there is an optimal level of firm concentration, where the market is not so consolidated to hinder innovation, but also not too fragmented to allow efficiencies to scale. The optimal level of concentration for labour productivity growth was higher at the industry level than the firm level, indicating that there is a point where industry labour productivity will benefit from a higher HHI as a whole, but an individual firm's labour productivity growth may suffer. The study also found that firms that are already leaders on labour productivity growth benefit more from higher levels of competition, and the paper warns that these firms may stagnate should competition in an industry decline.

In conclusion, the study shows that stronger competition is positively associated with labour productivity growth at both the firm an industry levels. However, when measured with HHI, the industry-level relationship between competition and labour productivity growth peaks at a moderate level of market concentration. This underscores the importance of policies that reinvigorate competitive pressure, particularly among leading firms, while supporting firms in catching up in labour productivity. The paper suggests that policy changes such as lowering barriers to entry for new firms, offering research and development or other technology adoption incentives, or more stringent anti-trust law enforcement can create and sustain the competitive dynamism that drives labour productivity growth. 

Statistics Canada: The Impact of Competition Intensity on Labour Productivity Growth in Canada