Essays in Import Competition

This dissertation examines how an increase in imports affects the toughness of competition, and through it the level of markups charged by domestic firms. The first chapter finds empirical evidence for this mechanism, while the second chapter explores its effects in general equilibrium. The first chapter studies the effect of the China Shock on US markups using a difference-in-difference empirical design. Trade liberalization affects domestic markups through both sales competition and the cost channel. To account for both, I combine markups constructed from Compustat with the US Input-Output tables. I find that, as a result of normalizing trade with China, US firms reduced their markup on competing goods by -0.04% on average, while firms facing liberalization on their inputs instead increased their markups by +1.4%. My findings suggest the anti-competitive effect of trade is as important as, and potentially larger than, the pro-competitive effects of trade. The second chapter studies the domestic gains from trade using a model with variable markups and multiple sector in an Input-Output structure. I find the gains from trade are smaller with variable markups, and increase with higher cost passthrough. Computing the model to the US in 1997 and 2007, I quantify the gains from trade to be 12.9%. In this period, the pro-competitive effect dominates the anti-competitive effects, and domestic labor decreases across the board.This study provides a first approximation to models with both competitive effects of imports, and their interaction with the gains from trade. Collectively, these chapters provide evidence and implications of both the procompetitive and anti-competitive effects of imports on domestic firms, with an emphasis on the change in markups along the Input-Output structure. This is a step forward in existing literature, but more importantly presents new elements for trade policy discussion and its effects on welfare.