Econometrica: Mar 2016, Volume 84, Issue 2

Prices, Markups, and Trade Reform

DOI: 10.3982/ECTA11042
p. 445-510

Jan De Loecker, Pinelopi K. Goldberg, Amit K. Khandelwal, Nina Pavcnik

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.



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Supplement to "Prices, Markups and Trade Reform"

This zip file contains the replication files for the manuscript.

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Supplement to "Prices, Markups and Trade Reform"

In this appendix, we compare our results to what would be obtained if one followed a standard approach of working with typical firm-level data that captures inputs and sales at the firm level.
 

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Comments

Corrigendum to "Prices, Markups, and Trade Reform"

This paper corrects a minor error found in Appendix D.

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