How Productivity Benefits from Competition

There’s nothing like a little competition to suddenly boost productivity.

Competition forced miners to double the amount of iron ore they dug per hour, as told in one case study. In another, competition forced concrete companies to become more efficient or go under, said Chad Syverson, associate professor of economics at the University of Chicago and a productivity specialist. Syverson spoke to students and faculty at a Brown Bag lunch lecture hosted by The Becker Center of Chicago Price Theory and sponsored by Vishal Verma, ’07 (XP-76), May 10 at the Charles M. Harper Center.

“Some people will say, ‘Well, wait a minute. I know from economic theory that even a monopolist will minimize the cost of producing whatever the optimal quantity is,’” Syverson said. “‘Why should we see any relation between competition and productivity?’

“That’s true in a more literal sense, but in a more general sense, figuring out the cheapest way to produce something isn’t as easy as we might think it is when we write it down in theory,” he said. Competition can make producers work harder to figure out how to reduce costs.

Syverson also talked about how productivity is shaped by management practices, on-the-job learning, and “Darwinian selection,” where less efficient businesses fail, leaving behind thriving, more efficient ones.

Still, much of what induces productivity remains illusive.

“Productivity is like magic” in that it’s hard to get hold of the immeasurable qualities that sway it, Syverson said. But that’s what makes it so much fun to research, he said.

Productivity is important because the higher it is, the lower the prices, the greater the output, the higher the return on capital, the higher the wages, and the greater the chance a business has of surviving.

In the iron ore case, written by James Schmitz Jr., American miners had produced two tons of iron ore per hour for decades. When Brazilian iron ore suddenly became cheap enough to import in 1982, everything changed. “This was competition that the U.S. miners in northern Michigan and northern Minnesota had never faced before,” Syverson said.

Within the span of five years, the miners doubled their productivity to four tons per hour.

Syverson did his own productivity study in the concrete market. Because concrete must be delivered within an hour or perish, transportation costs limit purchasers’ choices. This allowed Syverson to test affects of competition on productivity by splitting concrete markets into higher and lower density.

“If you’re in a market that’s very dense, it’s hard for you to be an inefficient concrete producer because your customers have a lot of other options nearby,” he said.

His case study of Ready Mix Concrete showed this to be true. “It does look like the Darwinian selection method is working and the inefficient producers are having a harder time operating in denser markets where competition is more intense,” Syverson said.

Syverson also examined how one efficiency mechanism, which he calls “learning by doing,” enhances productivity. He and other researchers looked at data recently acquired from a car assembly plant, where 15 cars a day were randomly pulled from the line and given “a colonoscopy,” Syverson said.

The car plant started building a new model in August. Average scores in the inspection audits that month totaled over 150 flaws per car. Starting in September, the best car had 20 flaws, the average was in the 60s, with a “fair chunk of scores” of more than 100 flaws, Syverson said.

Over the course of the next few months, the number of cars with many flaws declined, as did the average scores. Plant workers were figuring out what was going wrong on the production line and fixing those things, Syverson said. Assembly line speed was staying the same, but the quality of the car was getting higher. By January, “they were starting to run out of things to fix,” he said, with the average score having dropped to around 20.

In a Stanford study on productivity, Nick Bloom and John Van Reenen interviewed managers at 750 medium-sized firms in the United States, United Kingdom, France, and Germany. The study correlated high management evaluations with high productivity, Syverson said. Two factors influenced productivity: the amount of competition and “prima geniture,” in which a family-owned firm passes leadership down to the eldest son.

“In firms where the CEO is the son of the older founder of the firm, it’s clear that they’re taking a productivity hit,” Syverson said. “I hope no one here is the son of the founder of the firm. I’m sure you’re the exception to the rule,” he said to laughter. “There are distributions to everything.”

—Mary Sue Penn