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Mexican manufacturing markups: procyclical behavior and the impact of trade liberalization

  • Alejandro Castañeda

    ()

    (El Colegio de México)

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    This paper estimates the markup for the Mexican manufacturing sector to detect the impact of trade liberalization on market power. Using Hall’s proposal that states that a procyclical Solow residual is an indication of market power, this research estimates the markup for different periods to detect the change in market power after trade liberalization was implemented. We account for the potential cyclical behavior of the markup by including procyclical variables that affect the markup. The data shows a markup that moves counter-cyclically. The evidence is consistent with theoretical arguments advanced by Rotemberg and Saloner (1986). We pool four-digit industries and obtain estimates of the markup for the whole manufacturing sector. For the entire manufacturing sector, we find that trade liberalization acts as a market disciplining device that reduces the degree of market power. At the sector level, we find a significant reduction in market power in those sectors that experienced a strong liberalization process after the GATT negotiations. Also, those sectors that show a reduction in market power after the NAFTA implementation, show a liberalization process in which protection is eliminated at a faster pace than the average for the whole economy.

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    File URL: http://www.economiamexicana.cide.edu/num_anteriores/XII-2/Alejandro_Castaneda.pdf
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    Article provided by in its journal Economia Mexicana NUEVA EPOCA.

    Volume (Year): XII (2003)
    Issue (Month): 2 (July-December)
    Pages: 209-230

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    Handle: RePEc:emc:ecomex:v:12:y:2003:i:2:p:209-230
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    1. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 55-66, February.
    2. Nadiri, M Ishaq & Prucha, Ingmar R, 1996. "Estimation of the Depreciation Rate of Physical and R&D Capital in the U.S. Total Manufacturing Sector," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 43-56, January.
    3. Hanson, G.H. & Harrison, A., 1995. "Trade, Technology and Wage Inequality," Papers 95-20, Columbia - Graduate School of Business.
    4. 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.
    5. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
    6. Nelson, C. & Startz, R., 1988. "Some Furthere Results On The Exact Small Sample Properties Of The Instrumental Variable Estimator," Working Papers 88-06, University of Washington, Department of Economics.
    7. Alejandro Castañeda Sabido, 1998. "Measuring the degree of collusive conduct in the Mexican manufacturing sector," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 13(2), pages 157-169.
    8. Carsten Kowalczyk & Donald R. Davis, 1998. "Tariff Phase-Outs: Theory and Evidence from GATT and NAFTA," NBER Chapters, in: The Regionalization of the World Economy, pages 227-258 National Bureau of Economic Research, Inc.
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