Three essays in industrial organization and international trade

Abstract

The thesis focuses on firm demand-side shocks, heterogeneity, and competitiveness and their implications in industrial organization and international trade. The thesis improves the measurements of firm markup and productivity, investigates how firms can enhance demand-side competitiveness through investing in selling expenses, and sheds light on the sources of gains from exports.

Market power is costly to build and, once established, it is typically persistent and difficult to change. The first chapter of the thesis investigates the impact of large economic shocks (serious epidemics) on the redistribution of market power in manufacturing industries. Based on a stylized model of firms' dynamic decisions on production, pricing, and inventory, the analysis demonstrates the necessity of accounting for firm heterogeneity in inventory stock and demand uncertainty to understand market power. The model provides a straightforward measure of market power in the presence of uncertain demand and endogenous inventory stock. The paper finds that the 2003 SARS shock in China significantly reduced the market power of firms in the SARS-impacted areas, relative to others. The effect is long lasting. SARS also substantially increased firms' inventory and demand uncertainty in the SARS-affected areas, which contributed partially to the redistribution of market power.

The life cycle of firms features that young firms are smaller and have lower profitability than mature ones. Using a pretax deduction policy reform in China that reduces the costs of selling expenses of qualified young firms, the second chapter of the thesis investigates the effect of selling expenses and tax incentives on the growth of young manufacturing firms. The findings show that the reform incentivized qualified young firms to invest substantially more in selling expenses, which improved their output demand and profitability. The increased demand also induced greater investment in R&D due to complementarity. A counterfactual based on a structural model of the effects of firms' dynamic decisions on their selling expenses and R&D decisions demonstrates that the impact is quantitatively substantial. The pretax deduction policy increases the selling expenses ratio of qualified young firms by 1.75 percentage points (a 46 percent increase) on average. This results in an increase in their demand factor, productivity, and profitability by 22, 0.4, and 16 percent, respectively, in the long run. Overall, the paper finds that the age-based performance gap between young and mature firms is mainly driven by demand-side differences, rather than productivity as premised in the literature.

The productivity effect of export has been the foundation for many trade-related policies. However, empirical studies usually find a mixed effect. The third chapter shows that increasing returns to scale and markup are two important sources of gains from export, in addition to productivity effect. Because output prices are typically unavailable in most micro datasets, we develop a new method to consistently estimate firm-level markup, productivity, and returns to scale jointly, using the widely available revenue and inputs expenditure. We find that export has substantial efficiency gains, half of which is contributed by increasing returns to scale and the other half by export's productivity premium. The improved efficiency allows exporters to charge a higher markup but at a lower price. All together, firm profit increases by about a quarter after export in the Chinese manufacturing industry; consumers also benefit from lower prices. Increasing returns to scale also provide an explanation to why TFPR may fail to capture the export premium. (533 words in total)