NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Understanding Markups in the Open Economy under Bertrand Competition

Beatriz de Blas, Katheryn Russ

NBER Working Paper No. 16587
Issued in December 2010
NBER Program(s):   ITI

The purpose of this paper is to understand the effects of endogenous markups and trade costs on the pricing behavior of exporters when firms are heterogeneous in productivity. Using new analytical distributions for markups under Bertrand competition, we uncover Ricardian patterns of export pricing that generate higher markups and export price volatility when industrialized countries sell to developing countries. These Ricardian patterns dissipate when developing countries move from bilateral to multilateral trade liberalization. The results arise from a form of price rigidity for exports that arises endogenously due to cut-throat competition, even though prices are otherwise perfectly flexible.

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This paper was revised on July 18, 2012

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Document Object Identifier (DOI): 10.3386/w16587

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