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Endogenous Markups and Trade Elasticities

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Abstract

We develop a search model of international trade where buyers allocate costly cognitive attention across suppliers. Suppliers exploit the cost of shifting attention to extract markups, giving dominant firms the cushion to absorb cost shocks while marginal suppliers pass them on. Validating this mechanism with US tariff data, we estimate a highly concentrated US domestic market. Consequently, while targeted tariffs spur offshore substitution, blanket tariffs force buyers toward captive domestic monopolies. Incumbents' growing market power raises markups and halves the aggregate macro elasticity relative to micro estimates. Integrating endogenous market-power-dependent elasticity along the path to autarky more than doubles the US gains from trade compared with standard constant-elasticity predictions.

Suggested Citation

  • Anton Cheremukhin & Paulina Restrepo-Echavarria, 2026. "Endogenous Markups and Trade Elasticities," Working Papers 2026-024, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:103835
    DOI: 10.20955/wp.2026.024
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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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