DP13904 Markets and Markup: A New Empirical Framework and Evidence on Exporters from China

Author(s): Giancarlo Corsetti, Meredith A Crowley, Lu Han, Huasheng Song
Publication Date: August 2019
Keyword(s): China, differentiated goods, Exchange Rates, markup elasticity, pricing-to-market, product classification, Trade Elasticity
JEL(s): F14, F31, F41
Programme Areas: International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13904

Firms that dominate global trade export to multiple countries and frequently change their foreign destinations. We develop an estimator of the destination-specific markup elasticity to the exchange rate that controls for endogenous market selection. To proxy for firms' power in local markets, we introduce a new classification of products based on Chinese linguistics that distinguishes between highly and less differentiated goods. Using Chinese customs data, we show that controlling for selectivity unveils significant pricing-to-market for highly differentiated goods. Measured in the importer's currency, the prices of highly differentiated goods are more stable than those of less differentiated products.