Endogenous Markups and Trade Elasticities

Anton Cheremukhin and Paulina Restrepo-Echavarria

No 2026-024, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We develop a search model of international trade where buyers allocate costly cognitive attention across suppliers. Suppliers exploit the cost of shifting attention to extract markups, giving dominant firms the cushion to absorb cost shocks while marginal suppliers pass them on. Validating this mechanism with US tariff data, we estimate a highly concentrated US domestic market. Consequently, while targeted tariffs spur offshore substitution, blanket tariffs force buyers toward captive domestic monopolies. Incumbents' growing market power raises markups and halves the aggregate macro elasticity relative to micro estimates. Integrating endogenous market-power-dependent elasticity along the path to autarky more than doubles the US gains from trade compared with standard constant-elasticity predictions.

Keywords: trade elasticity; targeted search; rational inattention; gravity; market power; pass-through; gains from trade (search for similar items in EconPapers)
JEL-codes: D83 F10 F11 F13 L13 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2026-08-31
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DOI: 10.20955/wp.2026.024

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