Growth Policy , Agglomeration and ( the Lack of ) Competition ∗

Industrial clusters are promoted by policy and generally viewed as good for growth and development, but both clusters and policies may also enable noncompetitive behavior. This paper studies the presence of non-competitive pricing in geographic industrial clusters. We develop, validate, and apply a novel screen for collusive-like behavior. We derive the screen from the solution to a partial cartel of perfectly colluding firms in an industry. Outside of a cartel, a firm’s markup depends on its market share, but in the cartel, markups across firms converge and depend instead on the total market share of the cartel. Empirically, we validate the screen using plants with common owners, and then screen for collusion using data from Chinese manufacturing firms (1999-2009). We find strong evidence for non-competitive pricing within a subset of industrial clusters, and we find the level of non-competitive pricing is almost three times as high in Chinese special economic zones than outside those zones.