Crowley, M. A., Han, L., Prayer, T.
The Pro-Competitive Effects of Trade Agreements
JIWP Number: 2216
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 pro-competitive 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: competition
policy, firm level data, markup elasticity, trade agreements, trade elasticity, variable markups
JEL Codes: F13 F14 F15
Author links: Meredith Crowley Thomas Prayer
PDF: jiwp2216.pdf 
Open Access Link: 10.17863/CAM.87642
