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Prices, Markups, and Trade Reform

Author(s): De Loecker, Jan; Goldberg, Pinelopi K.; Khandelwal, Amit K.; Pavcnik, Nina

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Abstract: This paper examines how prices, markups, and marginal costs respond to trade liberalization. We develop a framework to estimate markups from production data with multi-product firms. This approach does not require assumptions on the market structure or demand curves faced by firms, nor assumptions on how firms allocate their inputs across products. We exploit quantity and price information to disentangle markups from quantity-based productivity, and then compute marginal costs by dividing observed prices by the estimated markups. We use India's trade liberalization episode to examine how firms adjust these performance measures. Not surprisingly, we find that trade liberalization lowers factory-gate prices and that output tariff declines have the expected pro-competitive effects. However, the price declines are small relative to the declines in marginal costs, which fall predominantly because of the input tariff liberalization. The reason for this incomplete cost pass-through to prices is that firms offset their reductions in marginal costs by raising markups. Our results demonstrate substantial heterogeneity and variability in markups across firms and time and suggest that producers benefited relative to consumers, at least immediately after the reforms.
Publication Date: 2016
Electronic Publication Date: 2016
Citation: De Loecker, Jan, Goldberg, Pinelopi K., Khandelwal, Amit K., Pavcnik, Nina. (2016). Prices, Markups, and Trade Reform. Econometrica, 84 (2), 445 - 510. doi:10.3982/ECTA11042
DOI: doi:10.3982/ECTA11042
ISSN: 0012-9682
Pages: 445 - 510
Type of Material: Journal Article
Journal/Proceeding Title: Econometrica
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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