IDEAS home Printed from https://ideas.repec.org/p/bon/boncrc/crctr224_2020_236.html
   My bibliography  Save this paper

Gravity With Granularity

Author

Listed:
  • Holger Breinich
  • Harald Fadinger
  • Volker Nocke
  • Nicolas Schutz

Abstract

We evaluate the consequences of oligopolistic behavior for the estimation of gravity equations for trade ows. With oligopolistic competition, firm-level gravity equations based on a standard CES demand framework need to be augmented by markup terms that are functions of firms' market shares. At the aggregate level, the additional term takes the form of the exporting country's market share in the destination country multiplied by an exporter-destination-specific Herfindahl-Hirschman index. For both cases, we show how to construct appropriate correction terms that can be used to avoid problems of omitted variable bias. We illustrate the quantitative importance of our results for combined French and Chinese firm-level export data as well as for a sample of product-level imports by European countries. Our results show that correcting for oligopoly bias can lead to substantial changes in the coefficients on standard gravity regressors such as distance or the impact of currency unions.

Suggested Citation

  • Holger Breinich & Harald Fadinger & Volker Nocke & Nicolas Schutz, 2020. "Gravity With Granularity," CRC TR 224 Discussion Paper Series crctr224_2020_236, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_236
    as

    Download full text from publisher

    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp236
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bas, Maria & Mayer, Thierry & Thoenig, Mathias, 2017. "From micro to macro: Demand, supply, and heterogeneity in the trade elasticity," Journal of International Economics, Elsevier, vol. 108(C), pages 1-19.
    2. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
    3. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    4. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 541-585.
    5. repec:hal:spmain:info:hdl:2441/2j87pv5ou185f980qgrpf9net0 is not listed on IDEAS
    6. Volker Nocke & Nicolas Schutz, 2018. "An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly," CRC TR 224 Discussion Paper Series crctr224_2018_024, University of Bonn and University of Mannheim, Germany.
    7. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    8. Heid, Benedikt & Stähler, Frank, 2024. "Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market," Economic Modelling, Elsevier, vol. 131(C).
    9. Chris Edmond & Virgiliu Midrigan & Daniel Yi Xu, 2015. "Competition, Markups, and the Gains from International Trade," American Economic Review, American Economic Association, vol. 105(10), pages 3183-3221, October.
    10. repec:hal:spmain:info:hdl:2441/6apm7lruv088iagm4rv2c33jtg is not listed on IDEAS
    11. Brander, James A., 1995. "Strategic trade policy," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 27, pages 1395-1455, Elsevier.
    12. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    13. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
    14. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
    15. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 441-487.
    16. repec:hal:spmain:info:hdl:2441/nki2gcedn93280ns6fslbhdnm is not listed on IDEAS
    17. Bernard, Andrew & Vandenbussche, Hylke & van Beveren, Ilke, 2012. "Concording EU Trade and Production Data over Time," CEPR Discussion Papers 9254, C.E.P.R. Discussion Papers.
    18. Redding, Stephen & Venables, Anthony J., 2004. "Economic geography and international inequality," Journal of International Economics, Elsevier, vol. 62(1), pages 53-82, January.
    19. Carsten Eckel & J. Peter Neary, 2010. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(1), pages 188-217.
    20. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    21. Amit K. Khandelwal & Peter K. Schott & Shang-Jin Wei, 2013. "Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters," American Economic Review, American Economic Association, vol. 103(6), pages 2169-2195, October.
    22. Parenti, Mathieu, 2018. "Large and small firms in a global market: David vs. Goliath," Journal of International Economics, Elsevier, vol. 110(C), pages 103-118.
    23. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057, Elsevier.
    24. Simon P. Anderson & Nisvan Erkal & Daniel Piccinin, 2020. "Aggregative games and oligopoly theory: short‐run and long‐run analysis," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 470-495, June.
    25. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    26. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 08-45.
    27. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
    28. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Heid, Benedikt & Stähler, Frank, 2024. "Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market," Economic Modelling, Elsevier, vol. 131(C).
    2. Georg Schneider & Frank Stähler & Georg U. Thunecke, 2022. "The (Non-)Neutrality of Value-Added Taxation," CESifo Working Paper Series 9663, CESifo.
    3. Yoto V. Yotov, 2022. "Gravity at Sixty: The Workhorse Model of Trade," CESifo Working Paper Series 9584, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    2. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    3. Heid, Benedikt & Stähler, Frank, 2024. "Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market," Economic Modelling, Elsevier, vol. 131(C).
    4. repec:hal:wpspec:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    5. repec:spo:wpmain:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    6. repec:hal:spmain:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    7. repec:spo:wpecon:info:hdl:2441/dambferfb7dfprc9m01g1j1k2 is not listed on IDEAS
    8. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2018. "Global Firms," Journal of Economic Literature, American Economic Association, vol. 56(2), pages 565-619, June.
    9. Natalie Chen & Dennis Novy, 2022. "Gravity and Heterogeneous Trade Cost Elasticities," The Economic Journal, Royal Economic Society, vol. 132(644), pages 1349-1377.
    10. Bas, Maria & Mayer, Thierry & Thoenig, Mathias, 2017. "From micro to macro: Demand, supply, and heterogeneity in the trade elasticity," Journal of International Economics, Elsevier, vol. 108(C), pages 1-19.
    11. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    12. Kristian Behrens & Giordano Mion & Yasusada Murata & Jens Südekum, 2014. "Trade, Wages, And Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(4), pages 1305-1348, November.
    13. Heid, Benedikt & Larch, Mario, 2016. "Gravity with unemployment," Journal of International Economics, Elsevier, vol. 101(C), pages 70-85.
    14. Bas, Maria & Mayer, Thierry & Thoenig, Mathias, 2017. "From micro to macro: Demand, supply, and heterogeneity in the trade elasticity," Journal of International Economics, Elsevier, vol. 108(C), pages 1-19.
    15. Dennis Novy, 2013. "Gravity Redux: Measuring International Trade Costs With Panel Data," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 101-121, January.
    16. Hoste, J. & Verboven, F., 2024. "Uncovering the Sources of Cross-border Market Segmentation: Evidence from the EU and the US," Cambridge Working Papers in Economics 2402, Faculty of Economics, University of Cambridge.
    17. Chen, Natalie & Novy, Dennis, 2011. "Gravity, trade integration, and heterogeneity across industries," Journal of International Economics, Elsevier, vol. 85(2), pages 206-221.
    18. Redding, Stephen & Weinstein, David, 2017. "Aggregating From Micro to Macro Patterns of Trade," CEPR Discussion Papers 12446, C.E.P.R. Discussion Papers.
    19. Mario Larch & Yoto V. Yotov, 2016. "General Equilibrium Trade Policy Analysis with Structural Gravity," CESifo Working Paper Series 6020, CESifo.
    20. Hillberry, Russell & Hummels, David, 2013. "Trade Elasticity Parameters for a Computable General Equilibrium Model," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1213-1269, Elsevier.
    21. Guillaume Daudin & Elizaveta Archanskaia, 2012. "Heterogeneity and distance puzzle," Working Papers hal-01073683, HAL.
    22. French, Scott, 2016. "The composition of trade flows and the aggregate effects of trade barriers," Journal of International Economics, Elsevier, vol. 98(C), pages 114-137.
    23. Baier, Scott L. & Bergstrand, Jeffrey H. & Feng, Michael, 2014. "Economic integration agreements and the margins of international trade," Journal of International Economics, Elsevier, vol. 93(2), pages 339-350.
    24. Peter Egger & Michael Pfaffermayr, 2011. "Structural Estimation of Gravity Models with Path-Dependent Market Entry," FIW Research Reports series III-007, FIW.

    More about this item

    Keywords

    Gravity Equation; Oligopoly; CES Demand; Aggregative Game;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bon:boncrc:crctr224_2020_236. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CRC Office (email available below). General contact details of provider: https://www.crctr224.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.