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The Pro-Competitive Effects of Trade Agreements

Author

Listed:
  • Crowley, M. A.
  • Han, L.
  • Prayer, T.

Abstract

How does trade policy affect competition? Using the universe of product exports by firms from eleven low and middle-income countries, we document that tariff reductions under trade agreements have strong pro-competitive effects - they encourage entry and reduce the (tariff exclusive) price-cost markups of exporters. This finding, that markups fall with tariff cuts, contradicts a core prediction of standard oligopolistic competition models of trade. We extend a workhorse international pricing model of oligopolistic competition to include multiple countries and a rich preference structure. Our preference structure allows for fierce competition among firms from the same country and less intense competition among firms from different countries. We show a firm's optimal markup after a tariff cut can rise or fall depending on the parameters of the preference structure and tari-induced reallocation of market share among firms and across countries.

Suggested Citation

  • Crowley, M. A. & Han, L. & Prayer, T., 2022. "The Pro-Competitive Effects of Trade Agreements," Cambridge Working Papers in Economics 2240, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2240
    Note: mc865, tp392
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    File URL: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2240.pdf
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    2. Matteo Neri-Lainé & Gianluca Orefice & Michele Ruta, 2023. "Deep Trade Agreements and Heterogeneous Firms Exports," CESifo Working Paper Series 10436, CESifo.
    3. Lionel Fontagn'e & Francesca Micocci & Armando Rungi, 2024. "The heterogeneous impact of the EU-Canada agreement with causal machine learning," Papers 2407.07652, arXiv.org, revised Jul 2024.

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    More about this item

    Keywords

    competition policy; firm level data; markup elasticity; trade agreements; trade elasticity; variable markups;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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