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Competition, Markups, and the Gains from

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  • Chris Edmond, Virgiliu Midrigan, Daniel Yi Xu,

Abstract

We study the gains from trade in a model with endogenously variable markups. We show that the pro-competitive gains from trade are large if the economy is characterized by (i) extensive misallocation,i.e., large ineciencies associated with markups, and (ii)a weak pattern of cross-country comparative advantage in individual sectors. We and strong evidence for both of these ingredients using producer-level data for Taiwanese manufacturing establishments. Parameterizations of the model consistent with this data thus predict large pro-competitive gains from trade, much larger than those in standard Ricardian models. In stark contrast to standard Ricardian models, data on changes in trade volume are not sufficient for determining the gains from trade.

Suggested Citation

  • Chris Edmond, Virgiliu Midrigan, Daniel Yi Xu,, 2012. "Competition, Markups, and the Gains from," Department of Economics - Working Papers Series 1145, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:1145
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    File URL: http://fbe.unimelb.edu.au/economics/research/workingpapers
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    References listed on IDEAS

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    1. Jan De Loecker & Frederic Warzynski, 2012. "Markups and Firm-Level Export Status," American Economic Review, American Economic Association, vol. 102(6), pages 2437-2471, October.
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    Cited by:

    1. Yilmazkuday, Hakan, 2016. "Constant versus variable markups: Implications for the law of one price," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 154-168.
    2. Beatriz de Blas & Katheryn N. Russ, 2015. "Understanding Markups in the Open Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 157-180, April.
    3. Federico Esposito, 2016. "Risk Diversification and International Trade," 2016 Meeting Papers 302, Society for Economic Dynamics.
    4. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, Elsevier.
    5. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Icebergs versus tariffs: A quantitative perspective on the gains from trade," University of Tuebingen Working Papers in Economics and Finance 53, University of Tuebingen, Faculty of Economics and Social Sciences.
    6. Opp, Marcus M. & Parlour, Christine A. & Walden, Johan, 2014. "Markup cycles, dynamic misallocation, and amplification," Journal of Economic Theory, Elsevier, vol. 154(C), pages 126-161.
    7. Holmes, Thomas J. & Hsu, Wen-Tai & Lee, Sanghoon, 2014. "Allocative efficiency, mark-ups, and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 94(2), pages 195-206.
    8. Ossa, Ralph, 2015. "Why trade matters after all," Journal of International Economics, Elsevier, vol. 97(2), pages 266-277.
    9. Wyatt J. Brooks & Pau S. Pujolàs, 2014. "Nonlinear Gravity," Department of Economics Working Papers 2014-15, McMaster University.
    10. Cœuré, Benoît, 2016. "The internationalisation of monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 8-12.
    11. Liliana Varela, 2018. "Reallocation, Competition, and Productivity: Evidence from a Financial Liberalization Episode," Review of Economic Studies, Oxford University Press, vol. 85(2), pages 1279-1313.
    12. Benjamin R. Mandel, 2013. "Chinese exports and U.S. import prices," Staff Reports 591, Federal Reserve Bank of New York.
    13. James A. Schmitz, 2012. "New and larger costs of monopoly and tariffs," Staff Report 468, Federal Reserve Bank of Minneapolis.
    14. Alexander Osharin & Valery Verbus, 2016. "Heterogeneous consumers and trade patterns in a monopolistically competitive setting," HSE Working papers WP BRP 131/EC/2016, National Research University Higher School of Economics.

    More about this item

    Keywords

    productivity; misallocation; comparative advantage; intra-industry trade.;

    JEL classification:

    • F1 - International Economics - - Trade
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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