Deregulation and Investment Spillovers in Multi-Product Production Settings

This paper studies how the removal of price regulation was associated with changes in quality, efficiency, and welfare in the Belgian bread and cake industry. In the summer of 2004, price controls on bread were abolished. Because most firms in this industry produce both bread and cakes, the reform provides a useful setting in which to examine both direct changes in the deregulated market and spillovers to a related product line. We use detailed firm-product-level information on values and physical quantities to estimate product quality, technical efficiency, marginal costs, markups, and welfare. We find that deregulation was associated with substantial improvements in both quality and efficiency. Welfare increased through gains in consumer surplus and producer surplus, and the gains were not confined to bread. We also find evidence of spillovers to cake production, suggesting that deregulation encouraged technological upgrading that affected firms' broader production process.