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Competitive effects of trade: theory and measurement

Marc Melitz

Review of World Economics (Weltwirtschaftliches Archiv), 2018, vol. 154, issue 1, 1-13

Abstract: Abstract In this paper, I develop a simple model of heterogeneous exporters to a single destination. This model highlights how the response of producer markups to market-level changes in that destination are intrinsically tied to the induced reallocation of export sales to that destination. I discuss how additional assumptions on the shape of demand (originally advocated by Alfred Marshall as his second law of demand) generate specific predictions for the response of those markups and induced product reallocations to increases in market size and competition in a destination: markups fall and market shares are reallocated towards better performing products. Recent evidence on French multi-product exporters strongly confirms this prediction for market share reallocations. The predictions for the markup responses are also consistent with the findings of the large empirical literature on pricing to market and incomplete pass-through.

Keywords: Heterogeneous Firm; Globalization; Variable Markups (search for similar items in EconPapers)
JEL-codes: F12 L11 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:spr:weltar:v:154:y:2018:i:1:d:10.1007_s10290-017-0303-3