Object of the paper and main results

1. The pro-competitive effect of imports from China: an analysis on firm-level price databyMATTEO BUGAMELLI, SILVIA FABIANI, ENRICO SETTEComment bySERGIO DE NARDIS(ISAE)Banca d’Italia, 27 November 2008

2. Object of the paper and main results Well defined target of the analysis Influence of rising Chinese penetration on the domestic-market price setting of Italian manufacturing firms Price can respond to “China” either through mark-up or marginal cost changes, or both H-F literature: Melitz-Ottaviano (2008) allow for endogenous responses of mark-up to foreign competition Clear-cut results Chinese import penetration in Italy moderated (short-run) price behaviour reducing the mark-up, not input cost: +1%  0.2% less; robust result, surviving various specification tests Price moderation concerned (supposedly) more price sensitive productions like scale intensive and traditional industries Heterogeneous reactions of firms in these industries: provided the negative sector effect of China, prices rise with Chinese penetration when interacting the latter with productivity With a “but” Not sure this is in the theory: in Melitz-Ottaviano more productive firms have larger mark-ups; this source of heterogeneity is enough to produce selection as competition rises One needs some other explanation rationalizing firm-level causation from rising Chinese penetration to stronger price dynamics, as firm productivity grows larger; I try to give a hint

3. Collocation of the paper in the debate Two different views, not necessarily mutually exclusive due to heterogeneity, on the effect of “China” #1. Chinese penetration moderates prices since it increases competition and reduces mark-ups #2. Chinese penetration has # 2.1 no effect on firm-level prices: Italian firms producing same goods as Chinese are simply displaced; remaining firms produce vertically differentiated goods; they do not need to change mark-up # 2.2 might even result in firm-level price increase, if China causes shifts of firms towards goods that are differentiated w.r.t. Chinese; prices rise What prevails? It is mainly an empirical matter: evidence of the paper is in favour of #1; I am a supporter of #2 THEORY BACKGROUND : #1 has safe background (tougher-competition effect); what about #2? Quality has been recently introduced in H-F models (Baldwin-Harrigan 2007, Borin 2008, Antoniades 2008); no causation from rising competition to firm-level quality/productivity upgrading (needed for #2.2) Yet, a channel may emerge if firms are multi-product: their efficiency is the average outcome of product-level productivity; firms change product scope in response to competition, pruning worst products; this affects firm-level average productivity (Bernard, Redding, Schott, 2006)

4. Specification issues Endogeneity: Relevant variable CHINA_ITs,t-1 is not significant; a fan of #2 would be happy with that. A skeptic would try to dig deeper, as in the paper with the argument of endogenity. It has plausibility in principle (by the same token IMPENcould be endogenous too), but one would ask for more discussion since: 1) the indicted variable has a large standard error (which should not be a symptom of endogeneity); 2) it enters with one year lag, a fact that would reduce the strength of the endogeneity argument. Endogeneity tests would help to reduce doubts Control for EMU/EURO. EMU entry induced restructuring, especially in traditional sectors (Bugamelli, Schivardi, Zizza, today), with shifts from core manufacturing to downstream and upstream activities; didn’t this affect firm-level pricing behaviour? Intermediate inputs. Sectors are differently exposed to intermediate-goods price shocks; absent relevant information, material input-prices are controlled for by interacting year and sector dummies; this might be insufficient Domestic/foreign prices. Dependent variable includes export prices; recent literature shows PTM practices of Italian firms, with unconventional behaviour in traditional sectors (Bugamelli 2007, Basile et al. 2008). Incidence of exporters is indeed checked in the paper; robustness tests could be enriched introducing exchange rate as a control variable and see whether it is influent

5. “One firm=one product” regards a minority of firms. Most firms are multi-product and change product menu in face of tougher competition: in which direction? Higher unit values

6. Summing up Very stimulative (and challenging for me) paper I agree that Chinese penetration had (some) pro-competitive effects in the domestic market, where less productive firms operate All the same, I think that both data and estimate results leave room for the product-differentiation story: within-industry/across-product specialization is a typical (typically Italian) response as exposure to imports from low-wage countries rises Intensity e pervasiveness of the pro-competitive Chinese effect could be related to some specification issues raised in this discussion Furthemore, estimates show more productive firms increase prices as Chinese competition rises: indications about within-firm product reshuffling toward higher unit-value goods could provide an explanation of this But here comes a complication: if firm-level productivity responds to competition, through product switching, it is endogenous; it should be instrumented…