Journal of Economic Behavior and Organization 18 (1992) 229-248. North-Holland Productivity and imperfect competition* Econometric estimation from panel-data of Italian firms Bruno Contini, Riccardo Revelli and Silvio Cuneo zyxwvutsrqponmlkjihgfedcbaZ University of Turin, Turin, Italy Received December 1989, final version received February 1991 This paper investigates the determinants of labor productivity from a large panel of Italian firms in 1973-1981. This is a period characterized by the accelerated opening of the European market and the reduction in the level of vertical integration of industry. A model of productivity with imperfect competition is derived and tested. The evidence in favor of imperfectly competitive markets is strong, and some patterns of change in market structure are detectable. The model confirms the important decline of labor cost flexibility in Italian manufacturing at the end of the Seventies. 1. Introduction This paper is devoted to the investigation of the determinants of labor value productivity in Italian industry in the 1973-1981 period. In much of the professional literature productivity and market structure are studied as separate issues. This is appropriate only where perfect competition may be assumed: with imperfect product markets, a different approach is necessary as monopolistic rents embodied in prices contribute to determine value productivity (physical productivity being seldom observed). In this paper we shall therefore derive a model in which changes of value productivity attributable to market structure may be identified under sufficiently general conditions. In Italy, as in most industrialized countries, demand grew at a steady rate until the beginning of the Seventies. When the first oil-crisis occurred and the price of raw materials rose, firms were faced with a situation that required new strategies in order to keep market share in the increasingly aggressive Correspondence to: Professor Bruno Contini, Dipartimento di Economia, Universita degli studi di Torino, via S. Ottavio, 20, 10124 Torino, Italy. *This research has been carried out thanks to grants CNR 86.01201.10 and MURS (40% 1989-90). We owe much to Silvana Tenga and Albert0 Colpo for their excellent research assistance. Comments by T. Abbott, M. Catalani, R.H. Day, Z. Griliches, F. Schiantarelli on earlier versions of this paper are also gratefully acknowledged. 0167-2681/92/$05.00 0 1992-Elsevier Science Publishers B.V. All rights reserved