Competitive effects of trade: theory and measurement

In this paper, I develop a simple model of heterogeneous exporters to a single destination. This model highlights how the response of producer markups to market-level changes in that destination are intrinsically tied to the induced reallocation of export sales to that destination. I discuss how add...

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Bibliographic Details
Published in:Review of world economics 2018-02, Vol.154 (1), p.1-13
Main Author: Melitz, Marc J.
Format: Article
Language:English
Subjects:
Competition
Economic Policy
Economic theory
Economics
Economics and Finance
European Integration
Exports
Global economy
International Economics
International trade
Law
Macroeconomics/Monetary Economics//Financial Economics
Market shares
Measurement
Original Paper
Predictions
Sales
Trade
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Summary:In this paper, I develop a simple model of heterogeneous exporters to a single destination. This model highlights how the response of producer markups to market-level changes in that destination are intrinsically tied to the induced reallocation of export sales to that destination. I discuss how additional assumptions on the shape of demand (originally advocated by Alfred Marshall as his second law of demand) generate specific predictions for the response of those markups and induced product reallocations to increases in market size and competition in a destination: markups fall and market shares are reallocated towards better performing products. Recent evidence on French multi-product exporters strongly confirms this prediction for market share reallocations. The predictions for the markup responses are also consistent with the findings of the large empirical literature on pricing to market and incomplete pass-through.
ISSN:1610-2878
1610-2886
DOI:10.1007/s10290-017-0303-3