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Trade costs, import penetration, and markups

Author

Listed:
  • Li, Yifan
  • Miao, Zhuang
Abstract
The rise of market power and the decline of labor's share of GDP in the United States in recent decades is well documented and have critical macroeconomic implications, but the determinants of such trends remain unclear. This paper asks how and to what degree increasing import penetration contributes to the more concentrated market structure and the associated rise of mark-ups. We provide a general equilibrium framework linking the change of markup with the extensive margin of foreign-input imports. In the model, a reduction of importing costs induces non-importers to start importing intermediates and existing importing firms to increase the share of imported inputs. But the capability of importing more varieties of inputs depends on productivity as it requires fixed costs to select cost-efficient intermediate inputs to import. We then combine firm-level micro panel data, sector-level trade data and input-output table to present empirical evidence on the relationship between the rise of market power and the increase of imported inputs penetration. At the 6-digit sector level, the rise of imported input penetration induced market concentration, implying that only the most productive firms benefit from trade liberalization. We further test our predictions of heterogeneous firms' decisions on intermediates importing and the implications on the market structure using transaction-level custom data: decreasing trade costs induce non-importing firms to start to import intermediates and allow the existing importing firms to charge higher markups than before.

Suggested Citation

  • Li, Yifan & Miao, Zhuang, 2018. "Trade costs, import penetration, and markups," MPRA Paper 85668, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:85668
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    References listed on IDEAS

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    Cited by:

    1. Li, Yifan & Miao, Zhuang & Tuuli, Maxwell, 2022. "Exchange rate volatility and import of intermediate inputs: Evidence from Chinese firms," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 120-134.
    2. Nolan, Brian & Richiardi, Matteo & Valenzuela, Luis, 2018. "The Drivers of Inequality in Rich Countries," INET Oxford Working Papers 2018-15, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    3. Li, Yifan & Miao, Zhuang, 2019. "Effect of Exchange Rate Volatility on Imports: Evidences from Chinese Firms," MPRA Paper 95088, University Library of Munich, Germany.

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    More about this item

    Keywords

    trade cost; import penetration; imperfect market competition; market power; markups;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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