Imperfect competition in firm-to-firm trade
Working Paper N° 363
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.