Pro‐competitive Effect of Trade and Non‐decreasing Price‐Cost Margins*

Published date01 June 2010
Date01 June 2010
DOIhttp://doi.org/10.1111/j.1468-0084.2009.00580.x
326
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2010. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 72, 3 (2010) 0305-9049
doi: 10.1111/j.1468-0084.2009.00580.x
Pro-competitive Effect of Trade and Non-decreasing
Price-Cost MarginsÅ
Herve Boulhol
Université Paris Panthéon-Sorbonne, 13 rue Chabrol, 75010 Paris, France (e-mail:
herve.boulhol@oecd.org)
Abstract
This study surveys the empirical evidence on the pro-competitive effect of inter-
national trade and analyses the determinants of price-cost margins for OECD
countries between 1970 and 2003. The main objective was to focus on the quanti-
cation of the impact of imports on margins, and understand why, despite trade
liberalization, price-cost margins have not fallen overall. On average, imports would
have contributed to a large decrease of ve percentage points in the price-cost
margins. However, these effects seem to have been partially counterbalanced by the
impacts of nancial deepening and disination.
I. Introduction
Trade theory teaches that international trade reduces mark-ups through the so-called
pro-competitive effect. The price elasticity of demand perceived by domestic rms
increases with foreign competition, which induces them to cut their margins. This
theoretical effect is of course ceteris paribus and according to Figure 1, which plots
the price-cost margin and the import penetration ratio at aggregated manufacturing
level for 17 OECD countries from 1970, trade developments do not seem at first sight
to have had the expected effect on margins: the negative correlation between the two
series is apparent for Japan and Spain only. Furthermore, the prediction of lower
mark-ups from globalization seems to conict with the high corporate prot rates
ÅI am grateful to Lionel Fontagn´e and Joaquim Oliveira Martins for their guidance. I also thank Patrick
Artus, Bruno Cr´epon, Ann Harrison, Keith Head, David Margolis, Philippe Martin, Felix Oberholzer-
Gee, Vincent Rebeyrol, two anonymous referees and the participants of the Global Scholars Network
Conference ‘Institutional Development: The Role of Business’,of the seminar at the OECD and at TEAM for
their comments, and Pierre Cahuc, David Galvin and Claudio Lucifora for their help.
JEL Classication numbers: F12, F16, L11, L13, L60, J50.
Pro-competitive effect of trade 327
Australia
0.10
0.15
0.20
0.25
0.30
70 73 76 79 82 85 88 91 94 97
Austria
0.05
0.15
0.25
0.35
70 73 76 79 82 85 88 91 94 97 00
70 73 76 79 82 85 88 91 94 97 0070 73 76 79 82 85 88 91 94 97 00
70 73 76 79 82 85 88 91 94 97 00 70 73 76 79 82 85 88 91 94 97 00 70 73 76 79 82 85 88 91 94 97 00
03
70 73 76 79 82 85 88 91 94 97 00 03
70 73 76 79 82 85 88 91 94 97 00
70 73 76 79 82 85 88 91 94 97 00 03
70 73 76 79 82 85 88 91 94 97 00
70 73 76 79 82 85 88 91 94 97 00
70 73 76 79 82 85 88 91 94 97 00
Belgium
0.05
0.15
0.25
0.35
0.45
Canada
0.05
0.15
0.25
0.35
Denmark
0.05
0.15
0.25
0.35
Finland
0.05
0.15
0.25
France
0.05
0.15
0.25
Italy
0.10
0.15
0.20
0.25
Japan
0.00
0.05
0.10
0.15
0.20
Netherlands
0.05
0.15
0.25
0.35
0.45 New Zealand
0.10
0.15
0.20
0.25
0.30
70 73 76 79 82 85 88 91 94 97
Spain
0.05
0.15
0.25
78 80 82 84 86 88 90 92 94 96 98 00
Sweden
0.00
0.10
0.20
0.30 UK
0.05
0.15
0.25
0.35
USA
0.00
0.05
0.10
0.15
0.20
Figure 1. Price-cost margin and import penetration ratio at the manufacturing level (- - -PCM; —import
penetration ratio)
Source: STAN, author’s calculations.
that have been observed around the world (Mishkin, 2008). Does this mean that the
pro-competitive effect has not materialized or that there have been counterbalancing
phenomena?
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2010

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