International Trade and Innovation Dynamics with Endogenous Markups

Laurent Cavenaile, Pau Roldan-Blanco and Tom Schmitz

The Economic Journal, 2023, vol. 133, issue 651, 971-1004

Abstract: We argue that the recent increases in market concentration and markups are partly due to an ‘innovation feedback effect’ of globalisation. Lower trade costs increase innovation incentives for global firms. As the winners of the ensuing innovation race increase their technological advantage, concentration and markups rise. We develop an endogenous growth model capturing this effect and calibrate it to US manufacturing data. We find that the increase in trade between 1989 and 2007 raised the aggregate markup by 3.5 percentage points. This is entirely due to innovation: without the innovation response, markups would have fallen by 4 percentage points.

Date: 2023
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Working Paper: International Trade and Innovation Dynamics with Endogenous Markups (2022)
Working Paper: International Trade and Innovation Dynamics with Endogenous Markups (2020)
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