Working Paper: NBER ID: w15749
Authors: Robert C. Feenstra; David E. Weinstein
Abstract: This paper is the first attempt to structurally estimate the impact of globalization on markups, and the effect of changing markups on welfare, in a monopolistic competition model. To achieve this, we work with a class of preferences that allow for endogenous markups and firm entry and exit that are especially convenient for empirical work - the translog preferences, with symmetry in substitution imposed across products. Between 1992 and 2005 we find the U.S. market experienced a series of changes that confirm a pro-competitive effect: import shares rose and U.S. firms exited, leading to an implied fall in markups, while product variety and welfare went up. We estimate the impacts of these effects on a national level, and find that U.S. welfare rose by as much as 0.86 percent between 1992 and 2005 as a result of these changes, with product variety contributing one-half of that total.
Keywords: Globalization; Markups; Welfare; Monopolistic Competition
JEL Codes: E31; F12; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased import shares (F14) | decrease in markups (D43) |
| US firms exit the market (F23) | decrease in markups (D43) |
| increased import shares (F14) | US welfare increase (I38) |
| decrease in markups (D43) | US welfare increase (I38) |
| increased product variety (L15) | US welfare increase (I38) |