Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241240 
Year of Publication: 
2021
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2021-17
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper studies the effects of endogenous firm-level market power in input and product markets on equilibrium prices and wages as well as the gains from trade using a general equilibrium model with heterogeneous firms. Firm-level prices and wages are functions of two endogenous distortions: (i) a markup of price over marginal cost that depends on product market shares and (ii) a markdown of wages relative to marginal revenue product that depends on labor market shares. Both distortions cause large firms to be too small relative to local labor market competitors compared to a setting with perfect competition in input and product markets. Opening product markets up to trade reallocates market shares in product and labor markets towards countries' large firms, which can reduce misallocation but also increases the labor market power of these firms. After estimating the structural parameters of the model using Indian plant-level data, I show that accounting for endogenous labor market power implies only small welfare losses due to misallocation and therefore a negligible increase in the gains from trade. Trade has significantly larger effects on firms' markups than on their markdowns. Nevertheless, because of the increase in large firms' input market power, there is a redistribution of the gains from trade from wages to firm profits.
Subjects: 
Economic models
Labour markets
Market structure and pricing
Productivity
Trade integration
JEL: 
D43
F12
F6
J
L13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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