Prices, Markups and Trade Reform

64 Pages Posted: 25 Mar 2012 Last revised: 27 Oct 2014

See all articles by Jan De Loecker

Jan De Loecker

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Pinelopi Goldberg

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Amit Khandelwal

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Bureau for Research and Economic Analysis of Development (BREAD)

Nina Pavcnik

Dartmouth College - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2012

Abstract

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.

Suggested Citation

De Loecker, Jan and Goldberg, Pinelopi (Penny) and Khandelwal, Amit Kumar and Pavcnik, Nina, Prices, Markups and Trade Reform (March 2012). NBER Working Paper No. w17925. Available at SSRN: https://ssrn.com/abstract=2028260

Jan De Loecker (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER) ( email )

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HOME PAGE: http://pages.stern.nyu.edu/~jdeloeck/

Centre for Economic Policy Research (CEPR) ( email )

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Pinelopi (Penny) Goldberg

Yale University - Department of Economics ( email )

P.O. Box 208268
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National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Amit Kumar Khandelwal

Columbia Business School - Finance and Economics ( email )

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United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/akhandelwal/

National Bureau of Economic Research (NBER) ( email )

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HOME PAGE: http://www.nber.org/people/amit_khandelwal

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
Durham, NC 90097
United States

Nina Pavcnik

Dartmouth College - Department of Economics ( email )

6106 Rockefeller Hall
Hanover, NH 03755
United States
603-646-2537 (Phone)
603-646-2122 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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