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

Abstract

We develop an empirical framework that decomposes the export price elasticity to the exchange rate into contributions from markup and marginal cost elasticities. This framework embodies a new estimator of the markup elasticity that controls for marginal costs and endogenous market participation, and a new classification of products based on Chinese linguistics that helps refine the analysis of firms' market power. Using Chinese customs data, we document a two- to three-fold increase in markup elasticities across product and firm types after 2005, indicating exporters from China acquired substantial market power in foreign markets.