Globalization, Markups, and Firm-level Export Status: Beyond the Constant Elasticity of Substitution

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To investigate the impact of pro-competitive effects on markups of firms in a globalization world, this study established a two-country-one-sector-two-factor trade model of monopolistic competition by applying a general utility function featuring the variable elasticity of substitution. Since firms are assumed to perform in the same productivity in this reconstructed footloose capital model, we can analytically grasp the relationships between globalization and firm-level markups on the basis of a representative firm.The main contributions of this study are four folds. First, we prove that in a two-factor setup, unilateral trade occurs when trade opens. The direction of the unilateral trade flow depends on parameters and function form of utility. Second, we show that the domestic markups in the larger country and the smaller country display opposite trends when trade opens. Then whether the domestic markup of a firm in the larger country goes up or down depends on the direction of unilateral trade flow. Three, we examine firm markups across firms' different markets and clarify the directions of these market-specific markups in response to the case of trade opening and the case of being close to free trade. We also find that the revenue-weighted average markup across all markets for a representative firm does not change monotonically along with the decreasing transport costs. Four, we prove that the home market effect in terms of firm share does not always prevail. It also depends on the direction of the unilateral trade flow.