Teams of Rivals: Endogenous Markups in a Ricardian World

We show that an ostensibly disparate set of stylized facts regarding firm pricing behavior can arise in a Ricardian model with Bertrand competition. Generalizing the Bernard, Eaton, Jenson, and Kortum (2003) model allows firms’ markups over marginal cost to fall under trade liberalization, but increase with FDI, matching empirical studies in international trade. We are able to mesh this dichotomy with the existence of pricing-to-market and imperfect pass-through, as well as to capture stylized facts regarding the frequency and synchronization of price adjustment across markets. The result is a well specified distribution for markups that previously could only be seen numerically and a way to quantify endogenous pricing rigidities emerging from a market structure governed by fierce competition among rivals. The authors thank Paul Bergin, Andrew Bernard, Swati Dhingra, Thibault Fally, Cecilia Fieler, Ann Harrison, Samuel Kortum, Kala Krishna, James Markusen, Virgiliu Midrigan, Martine Quinzii, Adam Russ, Burkhard Schipper, Monika Schnitzer, Raphael Schoenle, Joaquim Silvestre, Ina Simonovska, Barbara Spencer, Deborah Swenson, Andreas Waldkirch, and especially Stefania Garetto, Robert Feenstra, and Peter Neary for helpful suggestions, as well as participants at the 2010 American Economics Association winter meetings, the 2010 European Trade Study Group, DEGIT XV at Goethe University of Frankfurt, and the 2010 Western Economics Association International meetings. Beatriz de Blas acknowledges financial support from ECO2008-04073 project of the Spanish MEC, and CCG08-UAM/HUM-4438. Corresponding Email: [email protected]