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Tariffs and markups in retailing

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  • Cole, Matthew T.
  • Eckel, Carsten

Abstract

Tariffs on imported products are typically expected to raise the relative price of foreign goods and, as a result, increase the residual demands of domestic substitutes. In this paper we show, more generally, that these changes in wholesale/manufacturing prices can be offset and even dominated by adjustments in retail markups. Retailers have an incentive to charge the highest markups on the lowest-cost products and to adjust the markups on these products most actively. Thus, if the procurement costs of some foreign products rise, retailers will absorb these cost increases by raising prices relatively more on their relatively more efficient products, thereby mitigating the benefits of a protectionist tariff. We show that this effect can dominate the traditional substitution effect, which highlights the need to better understand the role of retailers in trade policy.

Suggested Citation

  • Cole, Matthew T. & Eckel, Carsten, 2018. "Tariffs and markups in retailing," Journal of International Economics, Elsevier, vol. 113(C), pages 139-153.
  • Handle: RePEc:eee:inecon:v:113:y:2018:i:c:p:139-153
    DOI: 10.1016/j.jinteco.2018.04.009
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    More about this item

    Keywords

    Variable markups; Retailing; Trade policy;

    JEL classification:

    • F1 - International Economics - - Trade
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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