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

Abstract

We build a new empirical framework for analyzing destination-specific markup and quantity adjustments by exporters. Our first contribution is an unbiased estimator of the destination-specific markup elasticity to the exchange rate that isolates marginal costs in large unbalanced panels where the set of markets served by a firm varies endogenously with currency movements. Our second contribution is to extend this methodology to estimate adjustments in a firm's trade volumes across markets that are associated with exchange rate-induced adjustments in markups; we dub this the cross-market supply elasticity. Our third contribution is a new classification of Harmonized System products into high and low differentiation goods-which we used as a proxy for exporters' market power. Exploiting information about Chinese "measure words" reported in customs declarations, we add value to existing classification systems including Rauch (1999) and the UN's Broad Economic Categories. Applying this framework to exporters from China, we find that the average markup elasticity is higher for high differentiation goods (20%) than for low differentiation goods (6%). The cross-market supply elasticities are correspondingly lower for high than low differentiation goods, 0.83 and 2.47, respectively.