Understanding Markups in the Open Economy

Abstract

This paper presents a new model of Bertrand competition between heterogeneous firms in the open economy where the macroeconomic distribution of markups responds to the degree of trade openness and the underlying level of technology in each trading partner. The model’s simple closed-form distributions for markups and pricing yield predictions that coincide with a number of stylized facts from the empirical literature on markups, pass-through, and trade openness which previously could be illustrated only through numerical simulations. (JEL D43, F12, F41, L13)

The Effect of GATT/WTO on Export and Import Price Volatility

“…De Blas and Russ () build a model on the pro‐competitive effects of trade, highlighting that firms can no longer pass along their own production cost shocks under multilateral trade agreements. Thus, by reducing their market power and inhibiting a markup effect, multilateral trade agreements might reduce the volatility of prices.…”

“…At the firm level, economic theory may also explain our results. De Blas and Russ () study analytically the pro‐competitive effects of trade in a model with heterogeneous firms and endogenous markups under Bertrand competition. They provide distributions of markups sensitive to the market structure, showing that multilateral treaties reduce the volatility of import and export prices.…”

“…De Blas and Russ () study analytically the pro‐competitive effects of trade, showing that multilateral trade agreements reduce the volatility of prices.…”

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

“…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.…”

Competition and the Welfare Gains from Transportation Infrastructure: Evidence from the Golden Quadrilateral of India

“…Gains in allocative efficiency are equivalent to pro-competitive gains since they are due to changing markups. Prominent papers in this large literature include Arkolakis, Costinot, Donaldson, and Rodríguez-Clare (2015), de Blas and Russ (2015), Dhingra and Morrow (2014), Edmond, Midrigan, and Xu (2015), Epifani andGancia (2011), Feenstra (2014), Feenstra and Weinstein (Forthcoming), Holmes, Hsu, and Lee (2014).…”