Transcript CHAPTER 1: PRO-COMPETITVE EFFECT OF TRADE

CHAPTER 1:
PRO-COMPETITVE EFFECT OF TRADE
1A: Imports as market discipline
1B: Empirical evidence
1C: Heterogeneity of firms, productivity,
mark-ups
Paper analysis: Bernard, Jensen & Schott (2006)
Globalisation and labour markets, H. Boulhol
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1A: What drives specialisation?
• Classical trade theory
comparative advantage arises from:
- differences in technology
- differences in factor endowments
under constant returns to scale and perfect
competition
• New trade theory
Increasing returns to scale enable to benefit from
size/scale effects under imperfect competition
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1A: Increasing returns to scale
•
•
i.r.s. rule out perfect competition
problem: imperfect competition can be
formalised in many ways
•
strategic behaviours of firms shape market
structure
•
new mechanisms:
i) size effects / increase in number of varieties
ii) pro-competitve effects: decrease in markups
iii) costs of transporting goods
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1A: Mark-ups, Price-cost margins
Fixed cost, oligopolistic behaviour
 price  marginal cost
mark  up 
i)
ii)
iii)
price
is:
marginal cost
a measure of the intensity of competition
a measure of the size of product market rents
a key parameter for the conduct of monetary and competition policies
how to measure mark-up? how to measure marginal cost?
Problem: measure of capital stock, user cost, speed of adjustment of the capital stock
See Boulhol (2008 a) for a discussion about common methods to estimate mark-ups
Convenient “simplistic” measure: price-cost margins
PCM 
sales - wages - intermedia tes capital costs  profits

sales
sales
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1A: Mark-ups, Price-cost margins
Under c.r.s. and no fixity of capital
Profit rate 
Profits
  1 - 1/  Lerner index
Sales
PCM  s K  (1  1 /  )
sK 
capital costs
 share of capital costs in total sales
sales
example :   1.25 s K  0.04
  0.20
PCM  0.24
1A: Mark-up and
Elasticity of perceived demand
max
p i (.) y i  c( y i )

f.o.c.:
yi
p i
y i  pi  ci '
y i

p y i 
  ci '
p i 1  i
y i p i 

At equilibrium, demand = output, i.e. d i  y i
and  i  
d i p i
pi
1

p i d i
p i / y i y i
 i is the elasticity of the demand perceived by firm i (>1)

1
p i 1 
i


  ci '


Mark-up =  i  p i / c i ' 
i  
i  ,
1
11 /  i
lim   1
 
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1A: Imperfect competition and
inefficient allocation
Two goods
X: perfect competition, c.r.s.
Y: imperfect competition, i.r.s. 
p X  c 'X
pY   cY'
c 'X
pX pX
MRT  '  

pY pY
cY
Good Y is too expensive, which drives too many resources in sector X
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1A: Trade intensifies competition
• Gains from trade can arise from dissipation of
rents
• “Oldest insight” in the area of trade policy under
imperfect competition
• Imports increase competition by bringing prices
closer to m.c. (reduced market power)
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1A: Mechanism
• Increase in the elasticity of the demand
perceived by firms facing import competition
• Effective entry of new (foreign) competitors
displace low efficient (domestic) firms
• Domestic producers are likely to face a fall in
their domestic market share
• Domestic concentration might increase,
while total concentration might decrease
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1A: Pro-competitive effect of trade
Examples (see Boulhol, 2008b for generalisation)
Aggregate demand: elasticity  (CES) between different goods
Substitution between varieties: elasticity  (CES)
Case 1:
Monopolistic competition: each firms is able to differentiate its own product
each firm is too small to influence other firms’ behaviour
 i   either in autarky or with trade

mark-up  i 
 1
Case 2:
Homogenous good (    ) + Cournot competition with segmented markets
Autarky:  i   / s i
Trade:  i   /s i (1   ) where  is the import penetration ratio,
   i  
i 
i 
1
1
1  si

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1A: Beneficial effect in terms of welfare
• Reduced market power
• Relative marginal utility closer to relative marginal cost
• Better allocation of resources across sectors
Beware: competition effect on welfare might not be
monotonous: too intense competition might deter
innovation
• Effect on aggregate productivity (Section 1C)
• Effect on worker / manager effort
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1A: Imports as product market discipline
Markusen et al. (1995)
2 identical countries: H, F
X perfect competition
Y homogenous good; a monopolist in each country, Cournot competition
Y  YH  YF
s H  YH / Y
,
Cournot competition:
max
YF
0
YH
Y

pY (YH  YF ) YH  cY (YH )
YH

1
pY  pY '
YH

pY  pY ' Y
Y
 cY ' (YH )
YH
Autarky: MRT 
cX '
cY '


pY (1  s H /  Y )  cY '
pX
(1  1 /  Y )
pY
Openness: no trade but threat of trade: MRT 
Example:  Y  2
Y
YH  cY ' (YH )
YH
Autarky: MRT  1 / 2
pX
pY
pX
(1  1 /(2 *  Y ))
pY
Openness: MRT  3 / 4
pX
pY
The threat of trade reduces the distortion related to imperfect competition by one half
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1A: Dumping
Hypothesis: 1) imperfect competition + fixed costs
2) segmented markets: domestic residents
cannot easily purchase goods intended for exports
Price discrimination: imperfect competition implies that
firms do not necessarily charge the same price for goods
that are exported and those sold to domestic buyers
Each firm practices dumping in the foreign market as a
result of total profit maximisation
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1A: Dumping
• Dumping is the most common form of price
discrimination in international trade:
a firm charges a lower price for exported goods
• Trade policy:
dumping is regarded as unfair (controversial)
special rules and penalties
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1A: Intuition behind dumping
• imperfectly integrated markets
(transport costs, trade and cultural barriers)
• larger share in home than in foreign markets
• foreign sales are more affected by their pricing
• lower margin on exports
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1A: Dumping can generate trade
• If firms are identical + homogenous good
then no dumping = no trade (because of transport costs)
But, incentive to limit the quantity sold domestically (to
maintain higher price) + sell abroad at lower price (still
above mc) = more profits
Intra-industry trade
Welfare? Reduced market power vs
wasteful to ship the same (or close substitute) good
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1A: Reciprocal dumping (B & K, 1983)
• Segmented markets, Cournot competition
(no interaction between firms under monopolistic comp.)
• good Z, price p , * means foreign
• constant marginal cost, c
fixed costs, F
• iceberg transport cost, g < 1 : marginal cost of foreign
sales = c/g
• x : output of the domestic firm sold at home
• y : output of the foreign firm sold at home
• x* : output of the domestic firm sold abroad
• y* : output of the domestic firm sold abroad
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1A: Reciprocal dumping (B & K, 1983)
Z=x+y
Z* = x* + y*
  x p ( Z )  x * p * (Z*) - c ( x  x * / g ) - F
*  y p ( Z )  y * p * (Z*) - c ( y  y * / g ) - F
FOC

 x p'  p  c  0
x
 *
 y p'  p  c/g  0
y
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1A: Reciprocal dumping (B & K, 1983)
Notations:
Share of the foreign firm in the domestic market :   y / Z
Demand elasticity:   -p / (p ' Z)
FOC
p  c  / (    - 1)
p  c  / (g(    ))
Intra-branch trade   0  p  c / g    1 /(1  g )
p  0    1/ 2    1/ 2
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1A: Reciprocal dumping (B & K, 1983)
Because of transport costs:
  1 / 2 means a lower market share abroad
higher marginal revenue abroad ( Rm ( x)  c , Rm * ( x*)  c / g )
lower mark-up abroad
dumping induces a decrease in prices
1A: Welfare effect of dumping
•
•
•
•
Size effect (+)
Pro-competitive effect (+)
Transport costs (-)
Overall effect is ambiguous
• Result 1: trade is beneficial when transport costs
are sufficiently low, and detrimental when high
• Result 2: with free entry, trade is beneficial
unambiguously
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Chapter 1: References
Mandatory readings in bold
1A
Brander, J., Krugman, P., 1983. A ‘Reciprocal Dumping’ model of international trade,
Journal of International Economics, 15, 313-321.
Boulhol, H., 2008a. The upward bias of markups estimated from the price-based
methodology, Annales d’économie et de statistique, Vol. 89.
De Melo, J., Grether, Commerce international, Chapitre 7, De Boeck eds.
Krugman, P.R., Obstfeld, M., 2008. International Economics, Chapter 6, Eighth edition,
Pearson eds.
1B
Boulhol, H., 2007. The convergence of price-cost margins, Open Economies Review, 19(2),
221-240.
Boulhol, H., 2008b. Pro-competitive effect of trade and non-decreasing price-cost
margins, Cahiers de la MSE.
Pavcnik, N., 2002. Trade Liberalization, Exit, and Productivity Improvement: Evidence from
Chilean Plants. Review of Economic Studies, vol. 69, No 1, 245-276.
Roberts, M.J., Tybout, J., 1996. Industrial Evolution in Developing Countries, Oxford UP.
1C
Antras, P., 2006. Lecture notes.
Bernard, A.B., Eaton, J., Jensen, J.B., Kortum, S., 2003. Plants and Productivity in
International Trade. American Economic Review 93 (4), 1268-1290.
Bernard, A.B., Jensen, J.B., Schott, P.K., 2006. Falling Trade Costs, Firms, and
Productivity, Journal of Monetary Economics, 53, 917-937.
Boone, J., 2000. Competition, CEPR Discussion Paper No 2636.
Melitz, M.J., 2003. The Impact of Trade on Intra-Industry Reallocations and Aggregate
Industry Productivity, Econometrica, 71, 1695-1725.
Melitz, M.J., Ottaviano, G.I.P., 2008. Market Size, Trade, and Productivity. Review of
Economic Studies, vol. 75, 295-316.
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