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This talk is about Competition, Markups and Cost Pass-through in the context of the Indian trade liberalization. 
There are two separate effects of trade liberalization that can affect prices in different directions.
To disentangle them, one has to estimate marginal costs and prices.
Measuring marginal costs is challenging. Some approaches have been tried and found to be problematic:
To disentangle them, one has to estimate marginal costs and prices.
Measuring marginal costs is challenging. Some approaches have been tried and found to be problematic:
The frequently employed "Demand Side Approach" has advantages & disadvantages.
A key advantage is that it includes a full modeling of the market. This allows simulating many counterfactuals & making policy predictions.
A key disadvantage is that it depends on many assumptions.
A key advantage is that it includes a full modeling of the market. This allows simulating many counterfactuals & making policy predictions.
A key disadvantage is that it depends on many assumptions.
Alternative: Production Side Approach
This approach also has some limitations, since the mark-up here is a wedge that in principle could be affected by other things, such as frictions or mis-specifications.
Big advantages: requires fewer assumptions and can be implemented using standard manufacturing firm surveys.
Big advantages: requires fewer assumptions and can be implemented using standard manufacturing firm surveys.
For those interested in the full paper where this is spelled out in more detail, see "Prices, Markups, and Trade Reform" by De Loecker, Goldberg, Khandelwal and Pavcnik, Econometrica 2016:
sites.google.com/site/deloecker…
sites.google.com/site/deloecker…
Application to the Indian Trade Liberalization: using the estimation of the markups with the new method introduced above.
In the cross-section find many of the expected features.
In the time series find very low cost pass-through of prices to consumers.
In the cross-section find many of the expected features.
In the time series find very low cost pass-through of prices to consumers.
This is robust to using a different data source: accounting data from the Annual Survey of Industries. Here also find increasing markups. Similarly to what others have found in the US.
Part of this increase in markups (at least in India) seems to stem from trade liberalization.
Part of this increase in markups (at least in India) seems to stem from trade liberalization.
Prices go down, but much less than the overall impact of the reform.
In other word, firms pocket a big part of the gains. This suggests that there is market power.
In other word, firms pocket a big part of the gains. This suggests that there is market power.
In conclusion:
Extension: connection to the increased in global market power.
Upward trend in market power may be related to the availability of to global value chains.
The upcoming World Development Report 2020 will address these issues. Stay tuned!
Upward trend in market power may be related to the availability of to global value chains.
The upcoming World Development Report 2020 will address these issues. Stay tuned!
