Concentration and Markups in International Trade

TL;DR

This paper develops a theoretical model linking import markup levels to market concentration, highlighting how exporter and importer concentration influence markups, and validates these insights with Colombian import data.

Contribution

It introduces a closed-form expression connecting aggregate markups to concentration in firm-to-firm trade, extending oligopoly theory to account for rigid trading relationships.

Findings

Markups increase with exporter concentration.

Markups decrease with importer concentration.

Empirical analysis confirms the theoretical predictions.

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.