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

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  • Alejandro Castañeda

    (El Colegio de México)

Abstract

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.

Suggested Citation

  • Alejandro Castañeda, 2003. "Mexican manufacturing markups: procyclical behavior and the impact of trade liberalization," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(2), pages 209-230, July-Dece.
    • Handle: RePEc:emc:ecomex:v:12:y:2003:i:2:p:209-230
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    References listed on IDEAS

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    3. Hanson, G.H. & Harrison, A., 1995. "Trade, Technology and Wage Inequality," Papers 95-20, Columbia - Graduate School of Business.
    4. 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 921-947, October.
    5. Olarreaga, Marcelo & Kee, Hiau Looi, 2001. "Mark-ups, Entry Regulation and Trade: Does Country Size Matter?," CEPR Discussion Papers 2853, C.E.P.R. Discussion Papers.
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