Mark-ups, Entry Regulation and Trade: Does Country Size Matter?

Marcelo Olarreaga and Hiau Looi Kee
Authors registered in the RePEc Author Service: Bernard Hoekman

No 2853, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Actual and potential competition is a powerful source of discipline on the pricing behavior of firms with market power. A simple model is developed that shows that the effects of import competition and domestic entry regulation on industry price-cost markups depend on country size. Barriers to domestic entry are predicted to have stronger anti-competitive effects in large countries, whereas the impact of barriers to foreign entry (i.e., imports) should be stronger in small countries. Following estimation of markups for manufacturing sectors in 41 developed and developing countries, these hypotheses are tested and cannot be rejected by the data. For example, although Italy and Indonesia impose the same number of regulations on entry of new firms, their impact on manufacturing markups is 20 percent higher in Italy due to its larger size. Similarly, Chile and Zimbabwe have the same import penetration ratio, but the market discipline effect of imports on markups is 13 percent higher in Zimbabwe due to its smaller size.

Keywords: Entry regulation; Import penetration; Industry markup; Country size (search for similar items in EconPapers)
JEL-codes: F12 F13 L11 L40 (search for similar items in EconPapers)
Date: 2001-07
References: Add references at CitEc
Citations: View citations in EconPapers (23)

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Working Paper: Markups, entry regulation, and trade - Does country size matter? (2001)
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