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Trade and Market Power in Product and Labor Markets

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  • Gaelan MacKenzie

Abstract

This paper studies the effects of endogenous firm-level market power in input and product markets on equilibrium prices and wages as well as the gains from trade using a general equilibrium model with heterogeneous firms. Firm-level prices and wages are functions of two endogenous distortions: (i) a markup of price over marginal cost that depends on product market shares and (ii) a markdown of wages relative to marginal revenue product that depends on labor market shares. Both distortions cause large firms to be too small relative to local labor market competitors compared to a setting with perfect competition in input and product markets. Opening product markets up to trade reallocates market shares in product and labor markets towards countries' large firms, which can reduce misallocation but also increases the labor market power of these firms. After estimating the structural parameters of the model using Indian plant-level data, I show that accounting for endogenous labor market power implies only small welfare losses due to misallocation and therefore a negligible increase in the gains from trade. Trade has significantly larger effects on firms' markups than on their markdowns. Nevertheless, because of the increase in large firms' input market power, there is a redistribution of the gains from trade from wages to firm profits.

Suggested Citation

  • Gaelan MacKenzie, 2021. "Trade and Market Power in Product and Labor Markets," Staff Working Papers 21-17, Bank of Canada.
  • Handle: RePEc:bca:bocawp:21-17
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    References listed on IDEAS

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    Cited by:

    1. Francesco Amodio & Nicolás de Roux, 2021. "Labor Market Power in Developing Countries: Evidence from Colombian Plants," Documentos CEDE 019267, Universidad de los Andes - CEDE.
    2. David Berger & Kyle Herkenhoff & Simon Mongey, 2018. "Labor Market Power," 2018 Meeting Papers 170, Society for Economic Dynamics.

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    More about this item

    Keywords

    Economic models; Labour markets; Market structure and pricing; Productivity; Trade integration;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • J - Labor and Demographic Economics
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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