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Mark-ups, Entry Regulation and Trade: Does Country Size Matter?

  • Hoekman, Bernard
  • Kee, Hiau Looi
  • Olarreaga, Marcelo

Actual and potential competition is a powerful source of discipline on the pricing behavior of firms with market power. A simple model is developed that shows that the effects of import competition and domestic entry regulation on industry price-cost markups depend on country size. Barriers to domestic entry are predicted to have stronger anti-competitive effects in large countries, whereas the impact of barriers to foreign entry (i.e., imports) should be stronger in small countries. Following estimation of markups for manufacturing sectors in 41 developed and developing countries, these hypotheses are tested and cannot be rejected by the data. For example, although Italy and Indonesia impose the same number of regulations on entry of new firms, their impact on manufacturing markups is 20 percent higher in Italy due to its larger size. Similarly, Chile and Zimbabwe have the same import penetration ratio, but the market discipline effect of imports on markups is 13 percent higher in Zimbabwe due to its smaller size.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2853.

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Date of creation: Jul 2001
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Handle: RePEc:cpr:ceprdp:2853
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  1. Henrik Horn & James Levinsohn, 1997. "Merger Policies and Trade Liberalization," NBER Working Papers 6077, National Bureau of Economic Research, Inc.
  2. Richardson, Martin, 1999. "Trade and Competition Policies: Concordia Discors?," Oxford Economic Papers, Oxford University Press, vol. 51(4), pages 649-64, October.
  3. Susanto Basu & John G. Fernald, 1995. "Are Apparent Productive Spillovers a Figment of Specification Error?," NBER Working Papers 5073, National Bureau of Economic Research, Inc.
  4. Harrison, Ann E., 1994. "Productivity, imperfect competition and trade reform : Theory and evidence," Journal of International Economics, Elsevier, vol. 36(1-2), pages 53-73, February.
  5. Damien NEVEN & Paul SEABRIGHT, 1995. "Trade Liberalisation and the Co-ordination of Competition Policy," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9503, Université de Lausanne, Faculté des HEC, DEEP.
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