NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Globalization, Markups and U.S. Welfare

Robert C. Feenstra, David E. Weinstein

NBER Working Paper No. 15749
Issued in February 2010
NBER Program(s):   ITI

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.

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This paper was revised on June 27, 2014

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Document Object Identifier (DOI): 10.3386/w15749

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