While there are regulatory barriers that hinder the efficient allocation of resources across sectors, regions and firms, some critical markets also have inherent features that reduce contestability and facilitate anti-competitive behavior. This is the case for markets such as cement, fuel distribution and LPG. In 2014, Brazil’s Competition Authority CADE sanctioned 6 domestic cement companies that represented 75 percent of the domestic cement market for forming collusive agreements. While local cement sales had doubled in the past decade, prices had increased by around 33 percent. CADE estimates that customers overpaid around US$9 billion over the two decades the cartel existed.<sup>45</sup> A total of 14 cartel agreements have been uncovered by CADE in fuel retail and LPG markets between 2002 and 2015. In one of these, subsequent consumer savings were estimated at over U$ 10 million a year.<sup>46</sup>

# **_5. Potential productivity dividends accruing from stronger competition_**

Boosting competition in product markets is expected to bring positive payoffs for productivity growth in the manufacturing industry. The acceleration of trade integration combined with the removal of policy induced stringencies that hamper resource allocation would reduce distortions to market functioning while boosting competition in product markets. An econometric analysis is conducted to measure the association between productivity growth and competition intensity for Brazil. The analysis draws on the methodology presented at Aghion, Braun and Fedderke (2008) and uses data at CNAE 3-digit level from 2007–2014 Pesquisa Industrial Annual (see Annex 3 for a methodological presentation). The results suggest that higher price cost margins (implying that firms face lower levels of competition intensity) are significantly associated with lower (labor) productivity growth in the following year (see Figure 28).<sup>47</sup> The economic magnitude of the (average) “effect” is non-negligible: a 10 percent decrease from the manufacturing overall mean price cost margin of 0.14 is associated with an increase in productivity growth of 3.4 percent per year. With regards to this average “effect”, two aspects are worth highlighting. First, the productivity dividends reflect overall competition pressure and therefore include both domestic and foreign competition pressure exerted by trade. In fact, the data show that sectors (at 3-digit level) with higher import penetration present lower price cost margins (see Figure 29), which suggests that increasing import penetration can be one effective channel to increase competition pressure.<sup>48</sup> In addition, a recent empirical analysis conducted by Kannebley Jr, Remedio and Oliveira (2017) shows that the recurrent use of protectionist trade interventions proxied by antidumping measures in the past three decades in Brazil has been associated with an increase in markups of firms that operate in protected sectors. Second, as expected, the magnitude of the (lagged) markup coefficient varies substantially across markets: the productivity growth dividend of a 10 percent decrease in average markup by sector varies from 1.43 percent (“Roasting and Milling of Coffee”) to 7.54 percent (“Magnetic and optical media”), as displayed in Figure A3.1 in Annex 3.

> 45 http://www.reuters.com/article/2014/05/29/brazil-cement-antitrust-idUSL1N0OE2IF20140529

> 46 http://www.cade.gov.br/upload/Brazil_Leniencia_Program_Brochure.pdf

> 47 The relationship between price cost margin and productivity is negative on average and did not present a U-shaped format, as the coefficient of the squared PCM term was not statistically significant (see column 2). This result suggests that, on average, higher degrees of competition are continuously expected to increase labor productivity growth, and there are no industries that may present ‘too much competition’.

> 48 Import penetration data were taken from the Confederacao Nacional da Industria website (available at http://www6.sistemaindustria.org.br/gpc/externo/estatisticaAcessoSistemaExterno.faces).

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