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Trade, markup heterogeneity and misallocations
Epifani, Paolo; Gancia, Gino
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence thattrade might be responsible for it and provide some quantifications of the induced welfare cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors.
10-09-2007
Macroeconomics and International Economics
markups
dispersion of market power
procompetitive effect
trade and welfare
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