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Markets and markups: a new empirical framework and evidence on exporters from China

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  • Corsetti, Giancarlo
  • Crowley, Meredith
  • Han, Lu
  • Song, Huasheng
Abstract
We develop a new empirical framework to analyse destination-specific markup and quantity adjustments to bilateral exchange rates by exporters. The framework offers two methodological innovations. First, we develop an unbiased estimator of the markup elasticity that correctly isolates marginal costs in large unbalanced panels where the set of markets served by firms varies endogenously with currency movements. Second, we exploit Chinese linguistics to process characters recorded in Chinese custom forms to build a novel, general, product classification distinguishing high and low differentiation goods|which we can use to proxy for exporters' market power. Applying this framework to exporters from China over 2000-2014, we document substantial heterogeneity in destination-specific markup elasticities across product classes and firm types. Conditional on a price change, the average markup elasticity for highly differentiated consumption goods is 32%; markup adjustments explain three quarters of incomplete pass through into import prices for these goods. In contrast, the average for low-differentiation intermediates is only 5%, suggesting that pricing for these goods responds to global, rather than local, economic conditions. Markup elasticities are higher for both state-owned and foreign-invested enterprises than for private enterprises, which, on average, pursue aggressively competitive strategies throughout our sample.

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  • Corsetti, Giancarlo & Crowley, Meredith & Han, Lu & Song, Huasheng, 2018. "Markets and markups: a new empirical framework and evidence on exporters from China," LSE Research Online Documents on Economics 87180, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:87180
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    Cited by:

    1. Zhe Chen & Yoshinori Kurokawa, 2022. "Do exporters respond to both tariffs and nominal exchange rates? Evidence from Chinese firm‐product data," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 514-548, May.
    2. Varela, Liliana & Alfaro, Laura & Calani, Mauricio, 2021. "Granular Corporate Hedging Under Dominant Currency," CEPR Discussion Papers 16232, C.E.P.R. Discussion Papers.
    3. Corsetti, Giancarlo & Crowley, Meredith & Han, Lu, 2022. "Invoicing and the dynamics of pricing-to-market: Evidence from UK export prices around the Brexit referendum," Journal of International Economics, Elsevier, vol. 135(C).
    4. Drenik, Andrés & Perez, Diego J., 2021. "Domestic price dollarization in emerging economies," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 38-55.
    5. Anatoli Colicev & Joris Hoste & Jozef Konings, 2019. "Exchange Rate Pass-through after a Large Depreciation," Working Papers 201902, University of Liverpool, Department of Economics.
    6. Crowley, M. A. & Han, L. & Son, M., 2024. "The Swift Decline of the British Pound: Evidence from UK Trade-invoicing after the Brexit Vote," Cambridge Working Papers in Economics 2413, Faculty of Economics, University of Cambridge.
    7. Chung, Wanyu & Perroni, Carlo, 2020. "Rules of Origin and Market Power," CAGE Online Working Paper Series 504, Competitive Advantage in the Global Economy (CAGE).
    8. David C. López-Valenzuela & Enrique Montes-Uribe & Héctor M. Zárate-Solano & Alvaro Carmona-Duarte, 2019. "Determinantes y evolución entre precios y cantidades de las exportaciones industriales de Colombia: un estudio a partir de un modelo de Panel-VAR," Borradores de Economia 1075, Banco de la Republica de Colombia.
    9. Meng, Ning & Milner, Chris & Song, Huasheng, 2020. "Antidumping and heterogeneous quality adjustment of multi-product firms: Evidence from Chinese exporters," Economic Modelling, Elsevier, vol. 92(C), pages 147-161.
    10. Delgado, Mercedes & Mills, Karen G., 2020. "The supply chain economy: A new industry categorization for understanding innovation in services," Research Policy, Elsevier, vol. 49(8).
    11. Sari, Dyah Wulan & Restikasari, Wenny & Ajija, Shochrul Rohmatul & Tarbiyah Islamia, Haura Azzara & Muchtar, Darmawati, 2021. "The Impacts of Foreign Direct Investment and Export Expansion on the Performance of the High-Tech Manufacturing Industry," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 55(2), pages 91-105.
    12. Mora, Jesse & Olabisi, Michael, 2023. "Economic development and export diversification: The role of trade costs," International Economics, Elsevier, vol. 173(C), pages 102-118.
    13. Alcover, M. & Crowley, M. A., 2019. "China -- Broiler Products: Can the sum of the parts be less than the whole?," Cambridge Working Papers in Economics 1985, Faculty of Economics, University of Cambridge.
    14. Crowley,Meredith A & Han,Lu & Prayer,Thomas, 2021. "The Value of Deep Trade Agreements in the Presence of Pricing-to-Market," Policy Research Working Paper Series 9600, The World Bank.
    15. Obashi, Ayako, 2019. "Trade agreements with cross-border unbundling," Journal of the Japanese and International Economies, Elsevier, vol. 53(C), pages 1-1.
    16. Antonio Acconcia & Elisa Scarinzi, 2022. "The effects of local demand and supply restrictions on markup," Temi di discussione (Economic working papers) 1370, Bank of Italy, Economic Research and International Relations Area.

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    Keywords

    exchange rates; pricing-to-market; product classification; differentiated goods; market power; markup elasticity; trade elasticity; China;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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