The dynamics of trade and competition

Natalie Chen, Jean Imbs, Andrew Scott

Research output: Contribution to journalArticle

Abstract

We estimate a version of the Melitz and Ottaviano [Melitz, Marc J. and Ottaviano, Gianmarco I.P., 2008, Market size, trade, and productivity, Review of Economic Studies 75(1), pp. 295-316.] model of international trade with firm heterogeneity. The model is constructed to yield testable implications for the dynamics of prices, productivity and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find short run evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. The response of profit margins to openness has implications on the conduct of monetary policy. Consistent with the predictions of some recent theoretical models we find some, albeit weaker, support that the long run effects are more ambiguous and may even be anti-competitive. Domestic trade liberalization also appears to induce pro-competitive effects on overseas markets.

Original languageEnglish (US)
Pages (from-to)50-62
Number of pages13
JournalJournal of International Economics
Volume77
Issue number1
DOIs
StatePublished - Feb 1 2009

Fingerprint

Openness
Productivity
Competitive effect
Trade openness
Prediction
Markups
Competitive structure
Short-run
Market size
Economics
Profit margin
Difference-in-differences
Trade liberalization
Firm heterogeneity
International trade
Monetary policy
Manufacturing

Keywords

  • Competition
  • Globalization
  • Inflation
  • Markups
  • Openness
  • Prices
  • Productivity

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

The dynamics of trade and competition. / Chen, Natalie; Imbs, Jean; Scott, Andrew.

In: Journal of International Economics, Vol. 77, No. 1, 01.02.2009, p. 50-62.

Research output: Contribution to journalArticle

Chen, Natalie ; Imbs, Jean ; Scott, Andrew. / The dynamics of trade and competition. In: Journal of International Economics. 2009 ; Vol. 77, No. 1. pp. 50-62.
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