The dynamics of trade and competition

Natalie Chen, Jean Imbs and Andrew Scott

Journal of International Economics, 2009, vol. 77, issue 1, 50-62

Abstract: We estimate a version of the Melitz and Ottaviano [Melitz, Marc J. and Ottaviano, Gianmarco I.P., 2008, Market size, trade, and productivity, Review of Economic Studies 75(1), pp. 295-316.] model of international trade with firm heterogeneity. The model is constructed to yield testable implications for the dynamics of prices, productivity and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find short run evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. The response of profit margins to openness has implications on the conduct of monetary policy. Consistent with the predictions of some recent theoretical models we find some, albeit weaker, support that the long run effects are more ambiguous and may even be anti-competitive. Domestic trade liberalization also appears to induce pro-competitive effects on overseas markets.

Keywords: Competition; Inflation; Openness; Globalization; Markups; Prices; Productivity (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (178)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022-1996(08)00104-9
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The Dynamics of Trade and Competition (2009)
Working Paper: The dynamics of trade and competition (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:77:y:2009:i:1:p:50-62

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().