The Pro-competitive Effects of Trade Agreements

Meredith Crowley, Lu Han and ,

No 17463, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 pro-competitive effects -- 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 firm’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: Trade agreements; Variable markups; Markup elasticity; Trade elasticity; Competition policy; Firm level data (search for similar items in EconPapers)
JEL-codes: F13 F14 F15 (search for similar items in EconPapers)
Date: 2022-07
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Related works:
Journal Article: The pro-competitive effects of trade agreements (2024)
Working Paper: The pro-competitive effects of trade agreements (2024)
Working Paper: The Pro-Competitive Effects of Trade Agreements (2022)
Working Paper: The Pro-Competitive Effects of Trade Agreements (2022)
Working Paper: The Pro-competitive Effects of Trade Agreements (2022)
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