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Understanding Markups in the Open Economy under Bertrand Competition

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  • Beatriz de Blas
  • Katheryn Russ

Abstract

The purpose of this paper is to understand the effects of endogenous markups and trade costs on the pricing behavior of exporters when firms are heterogeneous in productivity. Using new analytical distributions for markups under Bertrand competition, we uncover Ricardian patterns of export pricing that generate higher markups and export price volatility when industrialized countries sell to developing countries. These Ricardian patterns dissipate when developing countries move from bilateral to multilateral trade liberalization. The results arise from a form of price rigidity for exports that arises endogenously due to cut-throat competition, even though prices are otherwise perfectly flexible.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16587.

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Date of creation: Dec 2010
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Handle: RePEc:nbr:nberwo:16587

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  1. Linda S. Goldberg & Cédric Tille, 2009. "Micro, macro, and strategic forces in international trade invoicing," Staff Reports, Federal Reserve Bank of New York 405, Federal Reserve Bank of New York.
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Cited by:
  1. Linda Goldberg & Cedric Tille, 2013. "A bargaining theory of trade invoicing and pricing," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 144, Federal Reserve Bank of Dallas.
  2. Franziska Bremus, 2011. "Financial Integration and Macroeconomic Stability: What Role for Large Banks?," Discussion Papers of DIW Berlin 1178, DIW Berlin, German Institute for Economic Research.
  3. Thomas J. Holmes & Wen-Tai Hsu & Sanghoon Lee, 2013. "Allocative Efficiency, Mark-ups, and the Welfare Gains from Trade," NBER Working Papers 19273, National Bureau of Economic Research, Inc.
  4. Franziska Bremus, 2013. "Cross-Border Banking, Bank Market Structures and Market Power: Theory and Cross-Country Evidence," Discussion Papers of DIW Berlin 1344, DIW Berlin, German Institute for Economic Research.
  5. Bremus, Franziska & Buch, Claudia M. & Russ, Katheryn N. & Schnitzer, Monika, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," Munich Reprints in Economics, University of Munich, Department of Economics 20226, University of Munich, Department of Economics.
  6. Logan Lewis, 2013. "Menu Costs, Trade Flows, and Exchange Rate Volatility," 2013 Meeting Papers, Society for Economic Dynamics 313, Society for Economic Dynamics.
  7. Benjamin R. Mandel, 2013. "Chinese exports and U.S. import prices," Staff Reports, Federal Reserve Bank of New York 591, Federal Reserve Bank of New York.
  8. Jonathan Eaton & Samuel Kortum, 2012. "Putting Ricardo to Work," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 26(2), pages 65-90, Spring.

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