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Imperfect competition in firm-to-firm trade. National Bank of Belgium, Working Paper No. 363

Kikkawa, Ayumu Ken and Magerman, Glenn and Dhyne, Emmanuel (2019) Imperfect competition in firm-to-firm trade. National Bank of Belgium, Working Paper No. 363. [Working Paper]

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    This paper studies the implications of imperfect competition in firm-to-firm trade. Using a dataset on all transactions between Belgian firms, we find that firms charge higher markups if they have higher input shares among their buyers. We interpret this as firms competing as oligopolies to supply inputs to each buyer and build a model in which they charge different markups to different buyers. We use the estimated model to quantify how distortionary firm-to-firm markups are. Reducing all markups in firm-to-firm trade by 20 percent increases welfare by around 7 percent, suggesting large distortions due to double marginalization. We then investigate how endogenous markups in firm-to-firm trade alter predictions of the transmission of shocks. In the counterfactual where we take a fall in import prices as the shock, we show that allowing for oligopolistic competition generates larger cost reductions for some firms, and attenuates these for others relative to a case with constant markups. We demonstrate that a measure capturing firms’ positions in the production chain is a key metric in explaining this heterogeneity.

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    Item Type: Working Paper
    Uncontrolled Keywords: Firm-to-firm networks, imperfect competition
    Subjects for non-EU documents: Countries > Belgium
    EU policies and themes > Policies & related activities > economic and financial affairs > business/private economic activity
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 15 Oct 2019 16:52
    Number of Pages: 93
    Last Modified: 15 Oct 2019 16:52

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