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Competitive effects of trade: theory and measurement

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  • Marc J. Melitz

    (Harvard University)

Abstract

In this paper, I develop a simple model of heterogeneous exporters to a single destination. This model highlights how the response of producer markups to market-level changes in that destination are intrinsically tied to the induced reallocation of export sales to that destination. I discuss how additional assumptions on the shape of demand (originally advocated by Alfred Marshall as his second law of demand) generate specific predictions for the response of those markups and induced product reallocations to increases in market size and competition in a destination: markups fall and market shares are reallocated towards better performing products. Recent evidence on French multi-product exporters strongly confirms this prediction for market share reallocations. The predictions for the markup responses are also consistent with the findings of the large empirical literature on pricing to market and incomplete pass-through.

Suggested Citation

  • Marc J. Melitz, 2018. "Competitive effects of trade: theory and measurement," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 1-13, February.
    • Handle: RePEc:spr:weltar:v:154:y:2018:i:1:d:10.1007_s10290-017-0303-3
    DOI: 10.1007/s10290-017-0303-3
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    References listed on IDEAS

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    1. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2014. "Importers, Exporters, and Exchange Rate Disconnect," American Economic Review, American Economic Association, vol. 104(7), pages 1942-1978, July.
    2. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2021. "Product Mix and Firm Productivity Responses to Trade Competition," The Review of Economics and Statistics, MIT Press, vol. 103(5), pages 874-891, December.
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    12. Philippe Aghion & Antonin Bergeaud & Matthieu Lequien & Marc J. Melitz, 2024. "The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports," The Review of Economics and Statistics, MIT Press, vol. 106(3), pages 608-626, May.
    13. Bertoletti, Paolo & Epifani, Paolo, 2014. "Monopolistic competition: CES redux?," Journal of International Economics, Elsevier, vol. 93(2), pages 227-238.
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    17. Li, Hongbin & Ma, Hong & Xu, Yuan, 2015. "How do exchange rate movements affect Chinese exports? — A firm-level investigation," Journal of International Economics, Elsevier, vol. 97(1), pages 148-161.
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    19. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
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    Cited by:

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    2. David Rezza Baqaee & Emmanuel Farhi & Kunal Sangani, 2024. "The Darwinian Returns to Scale," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(3), pages 1373-1405.
    3. Matsuyama, Kiminori & Ushchev, Philip, 2022. "Selection and Sorting of Heterogeneous Firms through Competitive Pressures," CEPR Discussion Papers 17092, C.E.P.R. Discussion Papers.
    4. Carlo Altomonte & Domenico Favoino & Monica Morlacco & Tommaso Sonno, 2021. "Markups, intangible capital and heterogeneous financial frictions," CEP Discussion Papers dp1740, Centre for Economic Performance, LSE.
    5. Joël Cariolle & Petros G Sekeris, 2021. "How export shocks corrupt: theory and evidence," Working Papers hal-03164648, HAL.
    6. repec:ecb:ecbdps:202115 is not listed on IDEAS
    7. Gene M. Grossman & Elhanan Helpman & Hugo Lhuillier, 2021. "Supply Chain Resilience: Should Policy Promote Diversification or Reshoring?," Working Papers 2021-8, Princeton University. Economics Department..
    8. Drivas, Kyriakos & Kalyvitis, Sarantis & Katsimi, Margarita, 2023. "Export prices and markups with a common currency: Empirical evidence from Greek exporting firms and euro adoption," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 79-98.
    9. Philippe Aghion & Antonin Bergeaud & Matthieu Lequien & Marc J. Melitz, 2024. "The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports," The Review of Economics and Statistics, MIT Press, vol. 106(3), pages 608-626, May.
    10. Yan Liang, 2023. "Misallocation and Markups: Evidence from Indian Manufacturing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 161-176, December.
    11. Anderson, Simon P. & de Palma, André, 2024. "Economic distributions, primitive distributions, and demand recovery in monopolistic competition," Journal of Economic Theory, Elsevier, vol. 217(C).
    12. Ferrando, Annalisa & McAdam, Peter & Petroulakis, Filippos & Vives, Xavier, 2021. "Product market structure and monetary policy: evidence from the Euro Area," Working Paper Series 2632, European Central Bank.
    13. David R. Baqaee & Emmanuel Farhi & Kunal Sangani, 2024. "The Supply-Side Effects of Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 132(4), pages 1065-1112.
    14. repec:ecb:ecbdps:202117 is not listed on IDEAS
    15. Imtiaz Ahmad & Zafar Mahmood, 2018. "Inventory, Marketing and Markups of Exporters: The Case of Spinning, Weaving and Finishing Textile Sector of Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 23(2), pages 1-17, July-Dec.

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    More about this item

    Keywords

    Heterogeneous Firm; Globalization; Variable Markups;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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