Product Competition and Firm Overcapacity: Evidence from China

We exploit the competition policy in China to test whether product competition affects firm's overcapacity. By introducing the shock of enacting of the Chinese Anti-Monopoly Law, our difference-in-differences estimation shows that the overcapacity of firms with larger market power has a significant decrease. The possible explanations are that the product competitions significantly increase after the monopoly activities and local protectionism are prohibited, which lead to the reduction of zombie firms, and the decline of firms' bank loans and over-investment inefficiency. The effects are more pronounced to stated-owned firms, political connected firms, firms in cities with lower regional marketization and firms under industries with less competition. Overall, this study provides timely policy implications for central regulators concerned with the outcomes of the enforcement for the anti-monopoly policy and the solutions for the overcapacity problems.