Market size and entry in international trade: Product versus firm fixed costs

This paper develops a theoretical framework to infer the nature of fixed costs from the relationship between entry patterns in international markets and destination market size. If fixed costs are at the firm level, firms take advantage of an intrafirm spillover by expanding firm‐level product range (scope). Few firms enter with many products and dominate international trade. If fixed costs are at the product level, an interfirm spillover reduces the fixed costs to export for all firms producing the product. The resulting entry pattern consists of many firms exporting different varieties of the same product. Using cross‐country data on firm and product entry, I find empirical evidence consistent with product‐level costs. More firms than products enter in larger markets offering their consumers lower prices and a greater variety of goods within the product category.     

Export Destination,Product Quality and Wages in a Middle‐Income Country. The Case of South Africa

A robust finding in the firm‐level literature is that exporting firms pay higher wages. Using South African data this paper investigates the relationship between export destination and wages at a worker level. South Africa, a middle‐income country, has two distinct main export markets—a regional market where per capita incomes are lower than at home, and an international market with higher per capita incomes. Our estimates show that workers in firms that export to the region earn less than those that produce for the domestic market. Those in firms that export outside the region earn more than either domestic producers or region‐only exporters. Much of this difference in wages can be explained by the premium the different types of exporters pay for skills. These results support previous studies which suggest that export destination is related to product quality which in turn is related to worker quality and therefore wages.     

Exporters in cross‐section: Direct versus intermediated trade

How do producers that export their goods directly differ from those that export through trade intermediaries? We take a standard model of trade with heterogeneous firms and add heterogeneity in quality to the usual heterogeneity in productivity. Modeling trade intermediaries as increasing marginal costs but decreasing fixed costs of exporting, we find that only firms with the highest quality‐adjusted productivity levels choose to export directly. Under certain parameter restrictions, the model shows that direct exporters tend to be larger and charge higher prices for their goods. In contrast to the literature, using Chinese customs data, we confirm that direct exporters do charge higher prices for their goods.     

Pricing to Firm: an Analysis of Firm‐ and Product‐level Import Prices*

We use Hungarian Customs data on product‐level imports of manufacturing firms to document that the import price of a particular product varies substantially across buying firms. We relate the level of import prices to firm characteristics such as size, foreign ownership, and market power. We develop a theory of “pricing to firm” (PTF), where markups depend on the technology and competitive environment of the buyer. The predictions of the model are confirmed by the data: import prices are higher for firms with greater market power, and for more essential intermediate inputs (with a high share in material costs). We take account of the endogeneity of the buyer’s market power with respect to higher import prices and unobserved cost heterogeneity within product categories. The magnitude of PTF is big: the standard deviation of price predicted by PTF is 21.5%.     

A Mixed Duopoly With Switching Costs

We examine the effects of switching costs in a two‐period Hotelling‐type model where a profit‐maximising private firm competes with a welfare‐maximising public firm. We show that, in contrast with the case in which both firms are private, where switching costs raise prices in both periods, in the mixed duopoly they raise prices in the second period but reduce them in the first period. Moreover, the first‐period price reduction is of such magnitude that switching costs reduce firms’ profits and raise consumer welfare. We also find that switching costs affect the consequences of privatisation in favour of firms and against consumers.     

Can a decline in search cost increase prices?

This paper provides a new explanation of why a decline in consumers’ price search cost may not lead to lower prices. In a duopoly with price competition, I show that when some consumers are captive to one firm, there may be a non‐monotonic relationship between search cost and market power; firms may charge high prices with higher probability and the average price charged may be higher when consumers’ price search cost falls below a critical level. Furthermore, when firms have asymmetric captive segments, expected prices charged by each firm may move in opposite directions as search cost declines.     

PRICE SETTING PRACTICES IN GREECE: EVIDENCE FROM A SMALL‐SCALE FIRM‐LEVEL SURVEY

The paper documents the price setting practices followed by some 400 or so firms operating in Greece. Survey replies reveal a low percentage of firms changing prices with frequency higher than annual and staggering of price changes during the year. As to firms’ reactions to unexpected shocks, prices appear to adjust sluggishly to cost shocks with asymmetries in price adjustment across positive and negative shocks. Adjustments to increases in costs appear speedier than those to reductions in demand. The data confirm a result found for other countries: the existence of cross‐sectional variations in price setting strategies and in the extent to which prices are adjusted in reaction to unexpected shocks. The results suggest a positive association between, on the one hand, product market competition and, on the other hand, state‐dependent pricing, frequent price changes and the likelihood of a price adjustment following an adverse demand shock.     

Markups,quality, and transport costs

This paper provides new evidence on trade prices based on firm-level data from France. It shows that firms charge higher free-on-board (net of transportation costs, hereafter noted as fob) unit values on exports to more distant countries. This finding holds within firms and products, and across destinations. The price premium paid by distant consumers is due to firms charging higher fob prices, and to higher transportation costs. A simple decomposition of the elasticity of import prices to distance shows that, after a fall in transport costs, almost 80% of the decline in import prices enjoyed by consumers is due to firms charging lower fob prices. This suggests a new channel through which changes in transport costs may affect welfare.     

Skills scarcity and export intensity

We describe a model of trade with skills-based product differentiation and non-proportional trade costs that predicts a positive correlation between firms' export intensity, the price of their exports and the wages they pay to their workers. In equilibrium, firms that employ workers with comparatively scarcer skills export a larger proportion of their output, pay higher wages and charge higher prices. In line with empirical evidence, the model predicts that trade liberalization can cause the distribution of earnings to become more polarized, with patterns that reflect the heterogeneous effects of trade liberalization on firms' export performance.     

Export rivalry and exchange rate pass‐through

In this paper, we investigate the influence of market rivalry on firm‐level exchange rate pass‐through. Similar to Bloom et al. Econometrica, 80 , 1347–1393 (2013), we define market rivalry as product market proximity, and expect the cross market spillovers, that is, through leaked information or reputation, to affect firm‐level export price. Using a comprehensive dataset from Chinese exporters for the 2000–2007 period, we find that in response to a higher degree of market rivalry firms are less responsive to exchange fluctuations. This unresponsiveness suggests a higher degree of exchange rate pass‐through. The influence of market rivalry is stronger among firms that export consumption and heterogeneous products, and to developed countries. Our results are robust to different measures of market rivalry and specifications.     

Local export spillovers in France

This paper investigates the presence of local export spillovers on both the extensive (the decision to start exporting) and the intensive (the export volume) margins of trade, using data on French individual export flows, at the product-level and by destination country, between 1998 and 2003. We investigate whether the individual decision to start exporting and exported volume are influenced by the presence of nearby product and/or destination specific exporters, using a gravity-type equation estimated at the firm-level. Spillovers are considered at a fine geographical level corresponding to employment areas (348 in France). We control for the new economic geography-type selection of firms into agglomerated areas, and for the local price effects of firms agglomeration. Results show evidence of the presence of export spillovers on the export decision but not on the exported volume. We interpret this as a first evidence of export spillovers acting through the fixed rather than the variable cost. Spillovers on the decision to start exporting are stronger when specific, by product and destination, and are not significant when considered on all products-all destinations. Moreover, export spillovers exhibit a spatial decay within France: the effect of other exporting firms on the export decision is stronger within employment areas and declines with distance.     

A laboratory study of advertising and price competition

We use a laboratory experiment to study advertising and pricing behavior in a market where consumers differ in price sensitivity. Equilibrium in this market entails variation in the number of firms advertising and price dispersion in advertised prices. We vary the cost to advertise as well as varying the number of competing firms. Theory predicts that advertising costs act as a facilitating device: higher costs increase firm profits at the expense of consumers. We find that higher advertising costs decrease demand for advertising and raise advertised prices, as predicted. Further, this comes at the expense of consumers. However, advertising strategies are more aggressive than theory predicts with the result that firm profits do not increase.     

Price Competition and Product Differentiation When Consumers Care for the Environment

Increasing environmental awareness may affect the pleasure of consuming a good for which an environment friendly substitute is available. In this paper, we investigate the market implication of product differentiation when customers are concerned about environmental aspects of the good. We use the spatial duopoly model to determine how environmental concern affects prices, product characteristics and market shares of the competing firms. Our analysis is based on a two-stage game, where at the first stage each firm chooses the characteristic of its product. At the second stage, each firm chooses its price. Equilibrium prices and market shares are affected by consumer awareness of the environment and by the higher costs for producing those goods. As for the Nash equilibria in the characteristics, we find three equilibria depending on the parameter constellation. In order to find out whether the market functions in an optimal way, we determine the choice of environmental characteristics by a welfare maximizing authority. The objective of the paper is to understand the environmental quality choices facing firms and to provide policies that would align private choices with the social optimum.JEL classifications: L11, Q38, H23     

The trade reducing effects of market power in international shipping

Developing countries pay substantially higher transportation costs than developed nations, which leads to less trade and perhaps lower incomes. This paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs. In the presence of market power, shipping prices depend on the demand characteristics of goods being traded. We show theoretically and estimate empirically that ocean cargo carriers charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route. These characteristics explain more variation in shipping prices than do conventional proxies such as distance, and significantly contribute to the higher shipping prices facing the developing world. A simple back of the envelope calculation suggests that eliminating market power in shipping would boost trade volumes by 5.9% (for the US) to 15.2% (for Latin America). Our findings are also important for evaluating the impact of tariff liberalization. Cargo carriers decrease shipping prices by 1–2% for every 1% reduction in tariffs.     

Productivity Performance of Export Market Entry and Exit: Evidence from Indian Firms

This paper contributes to the literature on exporting and firm productivity, focusing on export entry (efficiency), learning (post‐entry growth) and exit (inefficiency) by Indian firms. Drawing on 7000 firms during 1989–2009, our main objective is to examine the effect of exporting on firm productivity, correcting for selection bias using propensity‐score matching, which allows a “like‐for‐like” comparison between new exporters and nonexporters. Robust to different matching estimators, we find evidence of learning‐by‐exporting that new exporters acquire rapid productivity growth after entry, relative to nonexporters. We also find that (1) exporters are more productive than nonexporters; (2) productive firms tend to self‐select in entering the exporting market, and (3) least productive exporters are found to exit the export market as they experience adverse productivity effect prior to the year of exit. Our robust result on learning‐by‐exporting suggests that entering export market does appear to be a channel explaining the Indian recent growth miracle.     

On the Effects of Suggested Prices in Gasoline Markets

There is a widespread suspicion that suggested prices act as a focal point for individual firms when setting their prices. Oil companies announce suggested prices for gasoline stations in the Dutch retail market. We show that, compared to the gasoline spot market price, suggested prices contain additional information that explains retail price changes. We conclude that suggested prices have a horizontal coordinating effect in the sense that retail prices react to information that suggested prices contain and that is unrelated to firms’ costs (i.e., the information that firms use under normal competitive conditions).     

Product line pricing in a vertically differentiated oligopoly

Abstract This paper examines the joint pricing decision of products in a firm’s product line. When products are distinguished by a vertical characteristic, those with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is an additional price premium for products on the industry and/or the firm frontier, that is, for the products with the highest value of the characteristic in the market or in a firm’s product line. We also investigate the existence of price premia for lower‐ranked products and other product line pricing questions. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers, even after holding absolute quality constant. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). There is also evidence that a product’s price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm’s offerings constant), possibly as an attempt to reduce cannibalization. Finally, a product’s price declines with the time it is offered by a firm, suggesting intertemporal price discrimination.     

INTERNATIONAL DEVIATIONS FROM THE LAW OF ONE PRICE: THE ROLE OF SEARCH FRICTIONS AND MARKET SHARE*

This article examines the size and persistence of international deviations from the law of one price in an industry with search frictions. Cost differences lead foreign and domestic firms to price differently within countries. When local firms are more common in each country, there are large and persistent price differences across countries. Large and persistent changes in international relative costs lead to large and persistent changes in international relative prices. Dynamic considerations imply that the amount of a cost shock firms pass through to prices is U‐shaped in the market share of firms receiving the shock.     

Why Do Prices Remain Stable in the Bubble and Bust Period?

In spite of a large swing in real output growth in the bubble and bust period, aggregate prices remained relatively stable in Japan. Empirical results show that such price rigidity can be explained by the customer market model combined with financial constraints. The degree of financial constraints that firms face in the bubble and bust period fluctuates significantly, and the impact of financial positions on firms’ prices is counter-cyclical. In booms, liquidity-abundant firms invest in market share by keeping prices down, while in a recession financially constrained firms charge a high price to locked-in customers who remain loyal. Such counter-cyclicality is clearly observed in the pricing behavior of large firms that produce differentiated goods. In contrast, small firms whose product brand is not well established in the market cannot lock in customers, and hence financial constraints do not affect their pricing decisions.     

Dynamic Model for Market Competition and Price Rigidity

This article presents a price floor model in which durability, unit costs and production period are factors in explaining price rigidity. This article elaborates that cost structure plays an essential role in resolving the inconclusive relationship between market concentration and price rigidity. When the industry is characterized by decreasing returns of scale, the degree of price flexibility decreases as market competition intensifies. The reverse is true when the industry exhibits increasing returns of scale. The factors that cause price rigidity also foster price adjustment asymmetry and price adjustment lag. During times of recession, the model exhibits upward price flexibility as costs increase, but downward price rigidity as costs decrease. Even under forward-looking expectations, the way in which firms adjust prices could look as though they have adaptive expectations. If price stickiness is a characteristic of market competition, then public policies determined by price level could be too drastic for firms in competitive markets.