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Competition, Markups, and the Gains from International Trade

  • Chris Edmond
  • Virgiliu Midrigan
  • Daniel Yi Xu

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 inefficiencies associated with markups, and (ii) a weak pattern of cross-country comparative advantage in individual sectors. We find 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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18041.

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Date of creation: May 2012
Date of revision:
Handle: RePEc:nbr:nberwo:18041
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  1. Paolo Epifani & Gino Gancia, 2010. "Trade, markup heterogeneity and misallocations," IEW - Working Papers 469, Institute for Empirical Research in Economics - University of Zurich.
  2. Natalie Chen & Jean Imbs & Andrew Scott, 2006. "The dynamics of trade and competition," Working Paper Research 91, National Bank of Belgium.
  3. Christian Broda & David E. Weinstein, 2004. "Globalization and the Gains from Variety," NBER Working Papers 10314, National Bureau of Economic Research, Inc.
  4. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  5. Jan De Loecker, 2014. "Price, Markups and Trade Reforms," Working Papers id:5900, eSocialSciences.
  6. Robert C. Feenstra & David E. Weinstein, 2010. "Globalization, Markups and U.S. Welfare," NBER Working Papers 15749, National Bureau of Economic Research, Inc.
  7. Beatriz de Blas & Katheryn N. Russ, 2010. "Teams of rivals: endogenous markups in a Ricardian world," Globalization and Monetary Policy Institute Working Paper 67, Federal Reserve Bank of Dallas.
  8. Michael Peters, 2011. "Heterogeneous Mark-Ups and Endogenous Misallocation," 2011 Meeting Papers 78, Society for Economic Dynamics.
  9. Richard Pomfret & Patricia Sourdin, 2010. "Why do trade costs vary?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(4), pages 709-730, December.
  10. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
  11. Krishna, Pravin & Mitra, Devashish, 1998. "Trade liberalization, market discipline and productivity growth: new evidence from India," Journal of Development Economics, Elsevier, vol. 56(2), pages 447-462, August.
  12. Allan Collard-Wexler & John Asker & Jan De Loecker, 2011. "Productivity Volatility and the Misallocation of Resources in Developing Economies," Working Papers 11-13, New York University, Leonard N. Stern School of Business, Department of Economics.
  13. 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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