Global Production Networks and Imperfect Competition

Hanwei Huang, Kalina Manova, Perelló, Oscar and Frank Pisch

No 19408, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: How do production networks and market structure interact to shape the effects of trade and competition policy? We develop a model with two-sided firm heterogeneity, matching frictions, and imperfect supplier competition. More productive buyers match with more suppliers, inducing tougher supplier competition, lower input costs, and higher profits. Entry upstream thus benefits high-productivity buyers, while lower trade or matching costs favor mid-productivity buyers. Empirical evidence confirms that larger French and Chilean firms import higher quantities at lower prices as more Chinese suppliers enter, and that suppliers charge diversified buyers lower markups. We adapt methods for combinatorial, discrete-choice problems to estimate the model and perform counterfactuals. The interaction of endogenous networks and markups significantly amplifies the gains from policies that facilitate supplier entry or firm matching, and from deep trade agreements that combine tariff cuts with such policies. Fixed networks dampen while fixed markups amplify the gains from traditional tariff liberalization.

JEL-codes: D24 F10 F12 F14 L11 L22 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-com and nep-iaf
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Working Paper: Global Production Networks and Imperfect Competition (2026)
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