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Imperfect competition in firm-to-firm trade

Author

Listed:
  • Ayumu Ken Kikkawa

    (Sauder School of Business, University of British Columbia)

  • Glenn Magerman

    (Université Libre de Bruxelles)

  • Emmanuel Dhyne

    (National Bank of Belgium & Université de Mons)

Abstract

This paper studies the implications of imperfect competition in firm-to-firm trade. Using a dataset on all transactions between Belgian firms, we find that firms charge higher markups if they have higher input shares among their buyers. We interpret this as firms competing as oligopolies to supply inputs to each buyer and build a model in which they charge different markups to different buyers. We use the estimated model to quantify how distortionary firm-to-firm markups are. Reducing all markups in firm-to-firm trade by 20 percent increases welfare by around 7 percent, suggesting large distortions due to double marginalization. We then investigate how endogenous markups in firm-to-firm trade alter predictions of the transmission of shocks. In the counterfactual where we take a fall in import prices as the shock, we show that allowing for oligopolistic competition generates larger cost reductions for some firms, and attenuates these for others relative to a case with constant markups. We demonstrate that a measure capturing firms’ positions in the production chain is a key metric in explaining this heterogeneity.

Suggested Citation

  • Ayumu Ken Kikkawa & Glenn Magerman & Emmanuel Dhyne, 2019. "Imperfect competition in firm-to-firm trade," Working Paper Research 363, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201901-363
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    Cited by:

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    2. Johannes Boehm & Jan Sonntag, 2018. "Vertical Integration and Foreclosure: Evidence from Production Network Data," Sciences Po publications 2018-12, Sciences Po.
    3. Vasco M. Carvalho & Alireza Tahbaz-Salehi, 2019. "Production Networks: A Primer," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 635-663, August.
    4. Emmanuel Dhyne & Ayumu Ken Kikkawa & Magne Mogstad & Felix Tintelnot, 2021. "Trade and Domestic Production Networks," Review of Economic Studies, Oxford University Press, vol. 88(2), pages 643-668.
    5. Zhiyuan Chen & Aksel Erbahar & Yuan Zi, 2019. "Made and Created in China: Super Processors and Two-way Heterogeneity," Tinbergen Institute Discussion Papers 19-080/VI, Tinbergen Institute.
    6. Corrado Di Guilmi & Yoshi Fujiwara, 2020. "Does the supply network shape the firm size distribution? The Japanese case," CAMA Working Papers 2020-66, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Dobbelaere, Sabien & Wiersma, Quint, 2020. "The Impact of Trade Liberalization on Firms' Product and Labor Market Power," IZA Discussion Papers 12951, Institute of Labor Economics (IZA).
    8. Cajal-Grossi, Julia & Macchiavello, Rocco & Noguera, Guillermo, 2019. "International buyers' sourcing and suppliers markups in Bangladeshi garments," LSE Research Online Documents on Economics 102612, London School of Economics and Political Science, LSE Library.
    9. Grossi, Julia Cajal & Macchiavello, Rocco & Noguera, Guillermo, 2019. "International Buyers' Sourcing and Suppliers' Markups in Bangladeshi Garments," CAGE Online Working Paper Series 403, Competitive Advantage in the Global Economy (CAGE).
    10. Amiti, Mary & Dai, Mi & Feenstra, Robert C. & Romalis, John, 2020. "How did China's WTO entry affect U.S. prices?," Journal of International Economics, Elsevier, vol. 126(C).
    11. Gadenne, Lucie & Nandi, Tushar & Rathelot, Roland, 2019. "Taxation and Supplier Networks: Evidence from India," CEPR Discussion Papers 13971, C.E.P.R. Discussion Papers.
    12. Cédric Duprez & Glenn Magerman, 2019. "Price Updating with Production Networks," Working Papers ECARES 2019-07, ULB -- Universite Libre de Bruxelles.
    13. Cedric Duprez & Glenn Magerman, 2018. "Price Updating in Production Networks," Working Paper Research 352, National Bank of Belgium.

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    More about this item

    Keywords

    Firm-to-firm networks; imperfect competition;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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