The Pro-competitive Effects of Trade Agreements
Lu Han and
Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
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 procompetitive effects â€“ 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 firmâ€™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: competition policy; firm level data; markup elasticity; trade agreements; trade elasticity; variable markups (search for similar items in EconPapers)
JEL-codes: F13 F14 F15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com
Note: mc865, tp392
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2240
Access Statistics for this paper
More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().