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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 tari-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  

PDF: jiwp2216.pdf

Open Access Link: 10.17863/CAM.87642.3

Theme: transmission