The Pro-competitive Effects of Trade Agreements

Meredith Crowley, Lu Han and Thomas Prayer

No 202220, Working Papers from University of Liverpool, Department of Economics

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 procompetitive 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)
Pages: 54 pages
Date: 2022-07
New Economics Papers: this item is included in nep-bec, nep-com and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Forthcoming

Downloads: (external link)
https://www.liverpool.ac.uk/media/livacuk/schoolof ... Trade,Agreements.pdf First version, 2022 (application/pdf)

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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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:202220

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