Import Competition and Firm Markups in the Food Industry

Abstract

This paper assesses the relationship between import competition and firm‐level markups by examining the imports of intermediate and final goods. Using a rich firm‐level dataset of French food companies from 2001 to 2013, we find that, on average, increased final goods import competition (intermediate inputs) is negatively (positively) associated with firm‐level markups. These results are consistent with the trade models that predict the pro‐competitive effects of trade and the incomplete cost pass‐through to prices. Importantly, the reduction in markups due to the pro‐competitive effect of trade tends to be counterbalanced by the increase in markups induced by incomplete pass‐through. Our empirical analysis uncovers considerable heterogeneity in the effects of output and input import competition on markups. Our results particularly reveal that firm size and industry market structure (i.e. concentration) are key determinants of how firm‐level markups respond to import competition.