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Markets and Markups: A New Empirical Framework and Evidence on Exporters from China

Author

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  • Giancarlo Corsetti

    () (Centre for Economic Policy Research (CEPR)
    Centre for Macroeconomics (CFM)
    University of Cambridge)

  • Meredith Crowley

    () (Centre for Economic Policy Research (CEPR)
    University of Cambridge)

  • Lu Han

    (University of Cambridge)

  • Huasheng Song

    (Zhejiang University)

Abstract

We develop a new empirical framework to analyse destination-specific markup and quantity adjustments to bilateral exchange rates by exporters. The framework offers two methodological innovations. First, we develop an unbiased estimator of the markup elasticity that correctly isolates marginal costs in large unbalanced panels where the set of markets served by firms varies endogenously with currency movements. Second, we exploit Chinese linguistics to process characters recorded in Chinese custom forms to build a novel, general, product classification distinguishing high and low differentiation goods - which we can use to proxy for exporters' market power. Applying this framework to exporters from China over 2000-2014, we document substantial heterogeneity in destination-specific markup elasticities across product classes and firm types. Conditional on a price change, the average markup elasticity for highly differentiated consumption goods is 32%; markup adjustments explain three quarters of incomplete pass through into import prices for these goods. In contrast, the average for low-differentiation intermediates is only 5%, suggesting that pricing for these goods responds to global, rather than local, economic conditions. Markup elasticities are higher for both state-owned and foreign-invested enterprises than for private enterprises, which, on average, pursue aggressively competitive strategies throughout our sample.

Suggested Citation

  • Giancarlo Corsetti & Meredith Crowley & Lu Han & Huasheng Song, 2018. "Markets and Markups: A New Empirical Framework and Evidence on Exporters from China," Discussion Papers 1803, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1803
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    Cited by:

    1. Anatoli Colicev & Joris Hoste & Jozef Konings, 2019. "Exchange Rate Pass-through after a Large Depreciation," Working Papers 201914, University of Liverpool, Department of Economics.
    2. Corsetti, G. & Crowley, M. & Han, L., 2018. "Invoicing and the Dynamics of Pricing-to-market - Evidence from UK Export Prices around the Brexit Referendum," Cambridge Working Papers in Economics 1860, Faculty of Economics, University of Cambridge.
    3. Alcover, M. & Crowley, M. A., 2019. "China -- Broiler Products: Can the sum of the parts be less than the whole?," Cambridge Working Papers in Economics 1985, Faculty of Economics, University of Cambridge.
    4. Chung, Wanyu & Perroni, Carlo, 2020. "Rules of Origin and Market Power," The Warwick Economics Research Paper Series (TWERPS) 1300, University of Warwick, Department of Economics.
    5. Delgado, Mercedes & Mills, Karen G., 2020. "The supply chain economy: A new industry categorization for understanding innovation in services," Research Policy, Elsevier, vol. 49(8).
    6. Meng, Ning & Milner, Chris & Song, Huasheng, 2020. "Antidumping and heterogeneous quality adjustment of multi-product firms: Evidence from Chinese exporters," Economic Modelling, Elsevier, vol. 92(C), pages 147-161.
    7. Corsetti, Giancarlo & Crowley, Meredith A & Han, Lu, 2018. "Invoicing and Pricing-to-Market: A Study of Price and Markup Elasticities of UK Exporters," CEPR Discussion Papers 13282, C.E.P.R. Discussion Papers.
    8. Obashi, Ayako, 2019. "Trade agreements with cross-border unbundling," Journal of the Japanese and International Economies, Elsevier, vol. 53(C), pages 1-1.

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    More about this item

    Keywords

    Exchange rates; Pricing-to-market; Product classification; Differentiated goods; Market power; Markup elasticity; China;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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