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Productivity Spreads, Market Power Spreads and Trade

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  • Ralf Martin

Abstract

Much of recent Trade theory focuses on heterogeneity of firms and the differential impact trade policy might have on firms with different levels of productivity. A common problem is that most firm level dataset do not contain information on output prices of firms which makes it difficult to distinguish between productivity differences and differences in market power between firms. This paper develops a new econometric framework that allows estimating both firm specific productivity and market power in a semi-parametric way based on a control function approach. The framework is applied to Chilean firm level data from the early 1980, shortly after the country underwent wide ranging trade reforms. The finding is that in all sectors of the economy market power declined and productivity increased. In sectors with higher import penetration productivity particularly at the bottom end of the distribution increased faster. At the same time market power declined particularly so at the top end of the market power distribution. We also show, that ignoring the effect on market power leads to an underestimation of the positive effects of increased import penetration on productivity.

Suggested Citation

  • Ralf Martin, 2010. "Productivity Spreads, Market Power Spreads and Trade," CEP Discussion Papers dp0997, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0997
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    1. Ritschl, Albrecht & Sarferaz, Samad, 2009. "Crisis? What Crisis? Currency vs. Banking in the Financial Crisis of 1931," CEPR Discussion Papers 7610, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Emanuele Forlani, 2017. "Irish Firms’ Productivity and Imported Inputs," Manchester School, University of Manchester, vol. 85(6), pages 710-743, December.
    2. Richard Harris & John Moffat, 2011. "Plant-level Determinants of Total Factor Productivity in Great Britain, 1997-2006," SERC Discussion Papers 0064, Spatial Economics Research Centre, LSE.
    3. KATO Atsuyuki & KODAMA Naomi, 2011. "Markups, Productivity, and External Market Development: An empirical analysis using SME data in the service industry," Discussion papers 11057, Research Institute of Economy, Trade and Industry (RIETI).
    4. Atsuyuki Kato, 2012. "Productivity, returns to scale and product differentiation in the retail trade industry: an empirical analysis using Japanese firm-level data," Journal of Productivity Analysis, Springer, vol. 38(3), pages 345-353, December.

    More about this item

    Keywords

    Trade policy; productivity measurement; imperfect competition; productivity dispersion; productivity spread;

    JEL classification:

    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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