Seventeenth International Conference on Environmental, Cultural, Economic & Social Sustainability

Abstract

This study demonstrates the impact of international trade on the lowering markups of multiple varieties produced by a discrete firm differentiated in productivity. Market liberalization promotes head-to-head competition among productive heterogeneous firms. Therefore, in this pro-competitive market, productive firms would survive by reducing markups and adjusting their range of products, while inefficient firms fail to survive. Despite the importance of this topic, most trade studies employing firm-level granularity and heterogeneity mute a change in markups in the short-run, while they identify properties in the long-run equilibrium in terms of prices, a range of varieties, and profits. With an assumption of fixed firm-level productivities across symmetric economies in the short-run, market liberalization introduces head-to-head competition. In this pro-competitive market, the productive firms survive by pricing competition with exporters with symmetric productivities. In the quantitative analysis, the results show that the survivors in the liberalized market lower their markups and change the range of varieties in the short-run equilibrium.