Year: 2016
Type: article
Abstract: This paper examines how prices, markups and marginal costs respond to trade liberalization.We develop a framework to estimate markups from production data with multi-product rms.This approach does not require assumptions on the market structure or demand curves faced by rms, nor assumptions on how rms allocate their inputs across products.We exploit quantity and price information to disentangle markups from quantity-based productivity, and then compute marginal costs by dividing observed prices by the estimated markups.We use India's trade liberalization episode to examine how rms adjust these performance measures.Not surprisingly, we nd that trade liberalization lowers factory-gate prices and that output tari declines have the expected pro-competitive eects.However, the price declines are small relative to the declines in marginal costs, which fall predominantly because of the input tari liberalization.The reason for this incomplete cost pass-through to prices is that rms oset their reductions in marginal costs by raising markups.Our results demonstrate substantial heterogeneity and variability in markups across rms and time and suggest that producers beneted relative to consumers, at least immediately after the reforms.
Source: Econometrica
DOI: 10.3982/ecta11042
Language: English
Topic: Global trade and economics
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2111286724