Paper #1037

Title:

Trade, markup heterogeneity and misallocations

Authors:

Paolo Epifani and Gino Gancia

Date:

June 2007

Abstract:

We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence that trade might be responsible for it and provide some quantifications of the induced welfare cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors.

Keywords:

Markups, Dispersion of Market Power, Procompetitive Effect, Trade and Welfare

JEL codes:

F12, F15

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of International Economics, 83, 1-13, 2011

Download the paper in PDF format