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Torino, 22 February 2007 CNR Working Group on International Economics

Lucia Tajoli Discussion of the paper: Endogenous markups, international trade and the product mix by Carlo Altomonte and Alessandro Barattieri. Torino, 22 February 2007 CNR Working Group on International Economics. Two tasks of the paper.

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Torino, 22 February 2007 CNR Working Group on International Economics

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  1. Lucia TajoliDiscussion of the paper:Endogenous markups, international trade and the product mixby Carlo Altomonte and Alessandro Barattieri Torino, 22 February 2007 CNR Working Group on International Economics

  2. Two tasks of the paper • Estimates of the pro-competitive effect of imports on the markup of Italian firms • Interpretation of the unexpected results looking at firms’ responses to import competition Lucia Tajoli

  3. 1) Estimates of the effect of imports on markups • Interesting exercise to show the pro-competitive effect of imports in Italy, often considered a comparatively close and protected market • Comparison with other countries? • Marginal effect of imports reduces markups in the aggregate but over time markups increase: is the market becoming less competitive? • Industry-level results: little heterogeneity? Ranking by industry is meaningful? • More discussion of the results needed Lucia Tajoli

  4. 1) Estimates of the effect of imports on markups • Existing evidence on Italian firms’ markups • Fabiani, Gattulli, Sabbatini, The pricing behaviour of Italian firms: new survey evidence on price stickiness, ECB Working Paper No. 333, April 2004 • Marchetti, Markups and the Business Cycle: Evidence from Italian Manufacturing Branches, Open Economies Review, Vol.13, No.1, Jan. 2002 • Bottasso, Galeotti, Sembenelli, The impact of financing constraints on markups: theory and evidence from Italian firm level data, Ceris-CNR Working paper 6/97, 1997 Lucia Tajoli

  5. 1) Estimates of the effect of imports on markups: methodology • Same methodology as Konings and Vandenbussche JIE 2005 • Some problematic assumptions • constant returns to scale: we know they exist, how to deal with them? Graph 2 not fully convincing • constant markups over the group of firms: very unrealistic, and destroying one of the sources of firms’ heterogeneity. Why working with firm level data then ? Lucia Tajoli

  6. Constant markups? Source: Fabiani et al. (2004) Lucia Tajoli

  7. 2) Firms responses to increased competitive pressure • Facts to be explained: increase competitive pressure from imports together with increase in markups (elsewhere seen as Italian loss of market share in volumes much stronger than in values) • A different route to explain this apparent paradox in terms of change (upgrade) of product mix (interesting no prices!) Lucia Tajoli

  8. 2) Firms responses to increased competitive pressure • Is there evidence of a change of the product mix? • St.dev. of product share distribution has serious problems with the classification • concentrated product mix (high specialization) could allow for very high markups • product mix heterogeneity may indicate larger firms? • Which are the possible alternative explanations? How are they checked for? Lucia Tajoli

  9. 2) Firms responses to increased competitive pressure: alternatives to changes in the product mix • Increased concentration/larger firms • evidence ruling this out not fully convincing (sample strongly biased toward large firms, concentration in S group not moving linearly, very strong exit rate) • Re-organization of production, change in production techniques • e.g. with international fragmentation of production, increase in total imports does not imply an increase in competitive pressure, but quite the opposite Lucia Tajoli

  10. Summing up • interesting and relevant issue, much debated in Italy • use of a simple testable model • but high cost of some simplifications • more discussion needed for some of the empirical results • more testing of alternative interpretations of the results Lucia Tajoli

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