Endogenous Markups and Trade Elasticities

Anton Cheremukhin and Paulina Restrepo-Echavarria

No 2632, Working Papers from Federal Reserve Bank of Dallas

Abstract: We develop a search model of international trade where buyers allocate costly cognitive attention across suppliers. Suppliers exploit the cost of shifting attention to extract markups, giving dominant firms the cushion to absorb cost shocks while marginal suppliers pass them on. Validating this mechanism with U.S. tariff data, we estimate a highly concentrated U.S. domestic market. Consequently, while targeted tariffs spur offshore substitution, blanket tariffs force buyers toward captive domestic monopolies. Incumbents’ growing market power raises markups and halves the aggregate macro elasticity relative to micro estimates. Integrating endogenous market-power-dependent elasticity along the path to autarky more than doubles the U.S. gains from trade compared with standard constant-elasticity predictions.

Keywords: trade elasticity; targeted search; rational inattention; gravity; market power; pass-through; gains from trade (search for similar items in EconPapers)
JEL-codes: D83 F10 F11 F13 L13 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2026-09-21
References: Add references at CitEc
Citations:

Downloads: (external link)
https://dallasfed.org/research/papers/2026/wp2632 (text/html)
https://dallasfed.org/research/papers/2026/wp2632.pdf Full text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (https://dallasfed.org/research/papers/2026/wp2632.pdf [301 Moved Permanently]--> https://www.dallasfed.org/research/papers/2026/wp2632.pdf)

Related works:
Working Paper: Endogenous Markups and Trade Elasticities (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:103847

Ordering information: This working paper can be ordered from

DOI: 10.24149/wp2632

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().