Global Production Networks and Imperfect Competition

How do global production networks and market structure interact to shape the welfare effects of trade and competition policy? We develop a model with two-sided firm heterogeneity, matching frictions, and imperfect supplier competition. More productive buyers match with more suppliers, inducing tougher competition among them, lower input costs, and higher profits. Entry upstream thus benefits primarily high-productivity buyers, while lower trade or matching costs favor mid-productivity buyers. Reduced-form evidence confirms that larger French and Chilean firms import higher quantities at lower prices as more Chinese suppliers enter, and that suppliers charge diversified buyers lower markups. We estimate the model by adapting recent methods for combinatorial, discrete-choice problems. Counterfactuals reveal that the interaction of endogenous networks and markups significantly amplifies the gains from policies that facilitate supplier entry or firm matching, as well as from modern trade agreements that combine trade cost cuts with such policies.