Globalization and Market Power

Abstract

We use a large episode of trade liberalisation in Spain to test the rich set of links between trade and markups uncovered by modern trade theory. The effect of reductions in Spanish import tariffs on firm-level markups is pro-competitive but we find evidence of offsetting effects via other channels. In particular, freer trade increase market concentration, thereby putting upward pressure on markups and weakening the pro-competitive effects. Reallocation of market shares across firms pushes the aggregate markup up but the overall impact is pro-competitive. Therefore, the link between trade and the aggregate markup is driven by changes at the intensive margin, changes in firm-level markups.

Keywords: International trade, markups, oligopoly.