Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity

Abstract

Thanks are due to Costas Arkolakis, Andrés Rodríguez-Clare, Kadee Russ and seminar participants at the NBER and UCLA for helpful comments. Financial support from the National Science Foundation is gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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

“…Most of the international economics literature has studied import price indexes using homothetic preferences (e.g., Feenstra (1994), Broda and Weinstein (2006), Hsieh et al (2016), Amiti et al (2017), Feenstra and Weinstein (2017)). Of course, homothetic preferences preclude any focus on distributional issues across consumers 5 .…”

“…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.…”

“…To do this, we multiply by the sectoral import share in domestic absorption for each year, which is defined as in Feenstra and Weinstein (2017). Household-specific expenditure on imports from sector s are given by 33 The expenditure numbers are included in ) does not differ much across income groups: we find that in 2014, the share of imports in actual expenditure averaged about 10% across deciles, with a standard deviation of 0.5 percentage points.…”

“…To estimate the model parameters, we develop an extension of the Generalized Method of Moments (GMM) estimator of Feenstra (1994), which exploits the relationship between income elasticities and price elasticities for separable demand functions, and apply it to data on the universe of foreign establishments exporting to the United States from 1998 to 2014. We define a variety as the combination of a foreign establishment and a Harmonized System (HS) ten-digit product code, and, consistent with the literature around this estimator, distinguish between "continuing " varieties-those found in all years 1998-2014-and non-continuing varieties.…”

“…As can be seen from differentiating the markup term, firm v's markup is increasing in its quantity sold if˛v < 0, is decreasing in its quantity sold if˛v > 0, and is constant if˛v D 0. 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.…”