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Markets and Markups: A New Empirical Framework and Evidence on Exporters from China

Giancarlo Corsetti (), Meredith Crowley (), Lu Han () and Huasheng Song

No 1803, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: We develop a new empirical framework to analyse destination-specific markup and quantity adjustments to bilateral exchange rates by exporters. The framework offers two methodological innovations. First, we develop an unbiased estimator of the markup elasticity that correctly isolates marginal costs in large unbalanced panels where the set of markets served by firms varies endogenously with currency movements. Second, we exploit Chinese linguistics to process characters recorded in Chinese custom forms to build a novel, general, product classification distinguishing high and low differentiation goods - which we can use to proxy for exporters' market power. Applying this framework to exporters from China over 2000-2014, we document substantial heterogeneity in destination-specific markup elasticities across product classes and firm types. Conditional on a price change, the average markup elasticity for highly differentiated consumption goods is 32%; markup adjustments explain three quarters of incomplete pass through into import prices for these goods. In contrast, the average for low-differentiation intermediates is only 5%, suggesting that pricing for these goods responds to global, rather than local, economic conditions. Markup elasticities are higher for both state-owned and foreign-invested enterprises than for private enterprises, which, on average, pursue aggressively competitive strategies throughout our sample.

Keywords: Exchange rates; Pricing-to-market; Product classification; Differentiated goods; Market power; Markup elasticity; China (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna, nep-com, nep-opm and nep-tra
Date: 2018-02
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Related works:
Working Paper: Markets and Markup: A New Empirical Framework and Evidence on Exporters from China (2019) Downloads
Working Paper: Markets and Markups: A New Empirical Framework and Evidence on Exporters from China (2018) Downloads
Working Paper: Markets and markups: a new empirical framework and evidence on exporters from China (2018) Downloads
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