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Tariffs and Markups in Retailing

Author

Listed:
  • Matthew T. Cole

    () (Department of Economics, California Polytechnic State University)

  • Carsten Eckel

    () (University of Munich)

Abstract

Conventional wisdom suggests that domestic manufacturers benefit from cost advantages vis-a-vis their foreign rivals. Tariffs on imported products or exchange rate depreciations are typically expected to raise relative prices of foreign goods and shift residual demands of domestic substitutes outwards. Here we show that these changes in wholesale/manufacturing prices can be offset and even dominated by adjustments in retail mark-ups. Retailers have an incentive to charge the highest mark-ups for low-cost products, and to adjust the mark-ups on these products most actively. Thus, if the procurement costs of some foreign products rises, retailers will shift these cost increases towards the most efficient domestic products thereby mitigating the benefits of a protectionist tariff. We show that this effect can dominate the traditional substitution effect.

Suggested Citation

  • Matthew T. Cole & Carsten Eckel, 2016. "Tariffs and Markups in Retailing," Working Papers 1604, California Polytechnic State University, Department of Economics.
  • Handle: RePEc:cpl:wpaper:1604
    as

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    References listed on IDEAS

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    Keywords

    Variable Markups; Retailing; Trade Policy;

    JEL classification:

    • F1 - International Economics - - Trade
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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