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Understanding Markups in the Open Economy under Bertrand Competition

  • Beatriz de Blas
  • Katheryn Russ

The purpose of this paper is to understand the effects of endogenous markups and trade costs on the pricing behavior of exporters when firms are heterogeneous in productivity. Using new analytical distributions for markups under Bertrand competition, we uncover Ricardian patterns of export pricing that generate higher markups and export price volatility when industrialized countries sell to developing countries. These Ricardian patterns dissipate when developing countries move from bilateral to multilateral trade liberalization. The results arise from a form of price rigidity for exports that arises endogenously due to cut-throat competition, even though prices are otherwise perfectly flexible.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16587.

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Date of creation: Dec 2010
Date of revision:
Handle: RePEc:nbr:nberwo:16587
Note: ITI
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