Imperfect Competition in Firm-to-Firm Trade

Abstract

This paper studies the implications of imperfect competition in firm-to-firm trade. Exploiting data on the universe of sales relationships between Belgian firms, we document that firms’ markups increase in the average input shares among their buyers. Given this fact, we develop a model where firms charge supplier-buyer specific markups, which depend on the bilateral input shares. The estimated model suggests large distortions due to double marginalization: Reducing all markups in firm-to-firm trade by 20 percent increases welfare by 10 percent. We also highlight the importance of accounting for endogeneities in bilateral markups in predicting the effects of shock transmissions.

Keywords: Firm-To-Firm Markups, Domestic Production Networks, Double Marginalization

JEL Classification: F12, L13