Competition, Markups, and the Gains from International Trade

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 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.

Estimating Unequal Gains across U.S. Consumers with Supplier Trade Data

“…8 For examples of papers that use the former, see Atkeson and Burstein (2008), Edmond et al (2015), Hsieh et al (2016), and Amiti et al (2017). For the latter, see Arkolakis et al (forthcoming), Mrázová and Neary (2017), and Dhingra and Morrow (forthcoming) 9 In principle, we could allow variation in subsistence quantities of each variety across households (˛h v ), but we lack data to discipline this variation.…”

“…However, most existing research hard-wires the sign of the relationship between the price elasticity of demand and sales, and thus implies "pro-competitive" effects of trade: reduced markups of incumbents as a result of more foreign entry (and thus lower incumbent market shares). This is the case with standard preferences and market structures such as CES with oligopoly (Atkeson and Burstein (2008), Edmond et al (2015)), Linear Demand (Melitz and Ottaviano (2008)), Logit demand (Fajgelbaum et al (2011)), Constant Absolute Risk Aversion, or CARA, preferences (Behrens andMurata (2007), Behrens andMurata (2012)), and Almost Ideal Demand/Translog preferences (Feenstra and Weinstein (2017)). In contrast, our new framework based on the S-branch utility tree allows us to directly test, instead of impose, how markups move with quantities sold.…”

“…Standard monopolistic competition models used in the trade literature based on demand systems such as Almost Ideal Demand or Translog (Feenstra and Weinstein (2017)), Linear demand (Melitz and Ottaviano (2008)), Logit demand (Fajgelbaum et al (2011)), and CARA demand (Behrens and Murata (2007)) do not feature anti-competitive effects from opening to trade. Additionally, trade models based on CES demand with oligopolistic competition (Atkeson and Burstein (2008), Holmes et al (2014), De Blas and Russ (2015), Edmond et al (2015)) also have the feature that larger market share implies larger market power, and thus successful import penetration must have pro-competitive effects in these models.…”

Trade Theory with Numbers: Quantifying the Consequences of Globalization

“…In recent work, Edmond, Midrigan, and Xu (2011) have used the model with Cournot competition developed by Atkeson and Burstein (2008) to study the magnitude of the gains from trade in economies with variable markups. When calibrating this model using data on manufacturing Taiwanese firms, they find large gains from trade, though the numbers vary depending on assumptions made on the correlation of productivity between Taiwanese and non-Taiwanese firms.…”

Constant versus variable markups: Implications for the law of one price

“…which can be substituted into Equation 19 to obtain an alternative expression for the price elasticity of demand:…”