The pro-competitive effects of trade agreements

Meredith Crowley, Lu Han and Thomas Prayer

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: How does trade policy affect competition? Using the universe of product exports by firms from eleven low and middle income countries, we document that tariff reductions under trade agreements have strong pro-competitive effects — they encourage entry and reduce the (tariff exclusive) price-cost markups of exporters. This finding, that markups fall with tariff cuts, contradicts a core prediction of standard oligopolistic competition models of trade. We extend a workhorse international pricing model of oligopolistic competition to include multiple countries and a rich preference structure. Our preference structure allows for fierce competition among firms from the same country and less intense competition among firms from different countries. We show a firm’s optimal markup after a tariff cut can rise or fall depending on the parameters of the preference structure and tariff-induced reallocation of market share among firms and across countries.

Keywords: trade agreements; variable markups; markup elasticity; trade elasticity; competition policy; firm level data (search for similar items in EconPapers)
JEL-codes: F13 F14 F15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2024-07-01
New Economics Papers: this item is included in nep-bec, nep-com and nep-int
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Published in Journal of International Economics, 1, July, 2024, 150. ISSN: 0022-1996

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http://eprints.lse.ac.uk/123982/ Open access version. (application/pdf)

Related works:
Journal Article: The pro-competitive effects of trade agreements (2024)
Working Paper: The Pro-Competitive Effects of Trade Agreements (2022)
Working Paper: The Pro-Competitive Effects of Trade Agreements (2022)
Working Paper: The Pro-competitive Effects of Trade Agreements (2022)
Working Paper: The Pro-competitive Effects of Trade Agreements (2022)
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