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.
The main work for this project was carried out while Goldberg was a Fellow of the Guggenheim Foundation, De Loecker was a visitor of the Cowles Foundation at Yale University and a visiting Professor at Stanford University, and Khandelwal was a Kenen Fellow at the International Economics Section at Princeton University. The authors thank the respective institutions for their support. We are grateful to Steve Berry, Elhanan Helpman, Ariel Pakes, Andres Rodriguez-Clare and Frank Wolak for useful discussions at early stages of this project and seminar participants at several institutions and conferences. We also thank the Editor, Jean-Marc Robin, and three anonymous referees for insightful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Jan De Loecker & Pinelopi K. Goldberg & Amit K. Khandelwal & Nina Pavcnik, 2016. " Prices, Markups, and Trade Reform, " Econometrica, Econometric Society, vol. 84, pages 445-510, 03. citation courtesy of