Trade, Markup Heterogeneity and Misallocations

36 Pages Posted: 7 Apr 2009

See all articles by Paolo Epifani

Paolo Epifani

Bocconi University - Department of Economics

Gino Gancia

Queen Mary University of London; Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI)

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Date Written: March 2009

Abstract

Markups vary widely across industries and countries, their heterogeneity has increased overtime and asymmetric exposure to international trade seems partly responsible for this phenomenon. In this paper, we study how the entire distribution of markups affects resource misallocation and welfare in a general equilibrium framework encompassing a large class of models with imperfect competition. We then identify conditions under which trade opening, by changing the distribution of markups, may reduce welfare. Our approach is novel both in its generality and in the emphasis on the second moment of the markup distribution. Two broad policy recommendations stand out from the analysis. First, whenever there is heterogeneity in markups, be it due to trade or other distortions, there is also an intersectoral misallocation, so that the equilibrium can be improved upon with an appropriate intervention. This suggests that trade liberalization and domestic industrial policy are complementary. Second, ensuring free-entry is a crucial pre-condition to prevent adverse effects from asymmetric trade opening.

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

JEL Classification: F12, F15

Suggested Citation

Epifani, Paolo and Gancia, Gino, Trade, Markup Heterogeneity and Misallocations (March 2009). CEPR Discussion Paper No. DP7217, Available at SSRN: https://ssrn.com/abstract=1372537

Paolo Epifani (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Gino Gancia

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

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