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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 pro-competitive gains from international trade in a quantitative model with endogenously variable markups. We find that trade can significantly reduce markup distortions if two conditions are satisfied: (i) there is extensive misallocation and (ii) opening to trade exposes hitherto dominant producers to greater competitive pressure. We measure the extent to which these two conditions are satisfied in Taiwanese producer-level data. Versions of our model consistent with the Taiwanese data predict that opening up to trade strongly increases competition and reduces markup distortions by up to one-third, thus significantly reducing productivity losses due to misallocation.

Suggested Citation

  • Chris Edmond & Virgiliu Midrigan & Daniel Yi Xu, 2011. "Competition , Markups, and the Gains from," Department of Economics - Working Papers Series 1183, The University of Melbourne, revised 2014.
  • Handle: RePEc:mlb:wpaper:1183
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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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    7. Grubel, Herbert G & Lloyd, P J, 1971. "The Empirical Measurement of Intra- Industry Trade," The Economic Record, The Economic Society of Australia, vol. 47(120), pages 494-517, December.
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    Citations

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    Cited by:

    1. 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.
    2. James A. Schmitz, 2012. "New and larger costs of monopoly and tariffs," Staff Report 468, Federal Reserve Bank of Minneapolis.
    3. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, Elsevier.
    4. Cœuré, Benoît, 2016. "The internationalisation of monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 8-12.
    5. Wyatt J. Brooks & Pau S. Pujolàs, 2014. "Nonlinear Gravity," Department of Economics Working Papers 2014-15, McMaster University.
    6. Benjamin R. Mandel, 2013. "Chinese exports and U.S. import prices," Staff Reports 591, Federal Reserve Bank of New York.
    7. Federico Esposito, 2016. "Risk Diversification and International Trade," 2016 Meeting Papers 302, Society for Economic Dynamics.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. Ossa, Ralph, 2015. "Why trade matters after all," Journal of International Economics, Elsevier, vol. 97(2), pages 266-277.
    13. 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.
    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

    misallocation; markup dispersion; head-to-head competition;

    JEL classification:

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

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