Mark-ups, Entry Regulation and Trade: Does Country Size Matter?
AbstractActual and potential competition is a powerful source of discipline on the pricing behavior of firms with market power. A simple model is developed that shows that the effects of import competition and domestic entry regulation on industry price-cost markups depend on country size. Barriers to domestic entry are predicted to have stronger anti-competitive effects in large countries, whereas the impact of barriers to foreign entry (i.e., imports) should be stronger in small countries. Following estimation of markups for manufacturing sectors in 41 developed and developing countries, these hypotheses are tested and cannot be rejected by the data. For example, although Italy and Indonesia impose the same number of regulations on entry of new firms, their impact on manufacturing markups is 20 percent higher in Italy due to its larger size. Similarly, Chile and Zimbabwe have the same import penetration ratio, but the market discipline effect of imports on markups is 13 percent higher in Zimbabwe due to its smaller size.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2853.
Date of creation: Jul 2001
Date of revision:
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Other versions of this item:
- Hoekman, Bernard & Hiau Looi Kee & Olarreaga, Marcelo, 2001. "Markups, entry regulation, and trade - Does country size matter?," Policy Research Working Paper Series 2662, The World Bank.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
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