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Markups, entry regulation, and trade - Does country size matter?, Volume 1
Author:Hoekman, Bernard; Hiau Looi Kee; Olarreaga, Marcelo; Date Stored:2001/09/28
Document Date:2001/08/31Document Type:Policy Research Working Paper
SubTopics:Water Conservation; Environmental Economics & Policies; Water Treatment & Quality; Montreal Protocol; Coastal and Marine Resources; Economic Theory & Research; Water and Industry; Banks & Banking Reform; Roads & Highways; Trade and Regional IntegrationLanguage:English
Major Sector:(Historic)Economic PolicyReport Number:WPS2662
Sub Sectors:TradeCollection Title:Policy, Research working paper ; no. WPS 2662
Volume No:1  

Summary: Actual, and potential competition is a powerful source of discipline on the pricing behavior of firms with market power. The authors develop a simple model that shows that the effects of new entry, and import competition on industry price-cost markups, depend on country size. The authors predicted that barriers to domestic entry would have a stronger anti-competitive effect in large countries, while barriers to foreign entry (imports) would have a stronger effect in small countries. After estimating markups for manufacturing sectors in forty-one industrial, and developing countries, they test these hypotheses, and find that the hypotheses cannot be rejected by the data. For example, although Indonesia, and Italy impose the same number of regulations on the entry of new firms, the effect of the regulations on manufacturing markups is twenty percent greater in Italy because of its larger size. Similarly, while Chile and Zimbabwe have the same import penetration ration, the market discipline effect of imports is thirteen percent greater in Zimbabwe because of its smaller size.

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