Concentration and Markups in International Trade

2025-08-01

AI Summary

This paper examines how bilateral market power mediates the relationship between import markups and market concentration in international trade. We develop a firm-level trade model integrating exporter oligopoly and importer monopsony power, moving beyond conventional unidirectional market definitions, and propose a novel concentration measure capturing trade relationship rigidity. Using closed-form derivations and oligopoly–monopsony equilibrium analysis, we empirically test the model using Colombian firm-level import data. Results show that higher exporter concentration significantly increases import markups, whereas greater importer concentration reduces them; conventional concentration measures—ignoring trade relationship rigidity—systematically underestimate the latter’s dampening effect. This study is the first to endogenize both export-side and import-side market power within a unified framework, offering a new theoretical foundation and measurement methodology for analyzing multinational input pricing and evaluating competition policy in global value chains.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Multiagent Systems: Mechanism Design
• Search and Optimization: Evaluation and Analysis

Application Category

• Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactions
• Security and Privacy: Large-scale security measurements
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

This paper derives a closed-form expression linking aggregate markups on imported inputs to concentration in a model of firm-to-firm trade with two-sided market power. Our theory extends standard oligopoly insights in two dimensions. First, it reveals that markups increase with exporter concentration and decrease with importer concentration, reflecting the balance of oligopoly and oligopsony forces. Second, it adapts conventional market definitions to reflect rigid trading relationships, yielding new concentration measures that capture competition in firm-to-firm trade. Analysis of Colombian transaction-level import data shows these differences are key to understanding markup dynamics in international trade.

Problem

• Analyzes how concentration affects markups in firm-to-firm trade
• Explores oligopoly and oligopsony forces in international trade dynamics
• Develops new concentration measures for firm-to-firm competition

Innovation

• Closed-form expression linking markups to concentration
• Extends oligopoly insights with two-sided market power
• New concentration measures for firm-to-firm trade