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The dispersion of mark-ups in an open economy

Author

Listed:
  • Stéphane Auray
  • Aurélien Eyquem

    (UL2 - Université Lumière - Lyon 2, GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne - EM - EMLyon Business School - CNRS - Centre National de la Recherche Scientifique)

Abstract
We introduce heterogeneous mark-ups through Bertrand competition in a two-country model with endogenous firms' entry and tradability `a la Ghironi and Melitz (2005). Bertrand competition generates a distribution of mark-ups according to which firms that are larger and more productive charge lower prices, attract larger market shares and extract larger mark-ups. First, we characterize first-best allocations and their implementation. We find that they are inde- pendent from the degree of mark-ups' heterogeneity, suppress the dispersion of mark-ups and imply zero distortions on labor as well as substantial subsidies to preserve firm's incentives to enter. Second, second-best alternative policies with a restricted number of instruments and a balanced budget significantly reduce the potential welfare gains from fiscal policies. Third, the total welfare losses from passive policies are lower under heterogeneous mark-ups than under homogeneous mark-ups: while the dispersion of mark-ups has negative effects on the intensive margin, output per firm, it also raises expected profits for potential entrants and raises the ex- tensive margin, the number of firms in both domestic and export markets, pushing them closer to their efficient levels. Fourth, we also investigate the dynamic properties of allocations under passive and optimal policies considering aggregate productivity shocks and trade liberalization experiments.

Suggested Citation

  • Stéphane Auray & Aurélien Eyquem, 2021. "The dispersion of mark-ups in an open economy," Working Papers hal-03373701, HAL.
    • Handle: RePEc:hal:wpaper:hal-03373701
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03373701v1
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    References listed on IDEAS

    as
    1. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 437-492.
    2. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 865-915.
    3. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353, National Bureau of Economic Research, Inc.
    4. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    5. Holmes, Thomas J. & Hsu, Wen-Tai & Lee, Sanghoon, 2014. "Allocative efficiency, mark-ups, and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 94(2), pages 195-206.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(2), pages 561-644.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    heterogeneous firms; endogenous entry; open economy; strategic pricing; optimal taxation;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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