Variable markups and multinational production have gathered considerable attention in the trade literature because of their empirical prevalence and welfare implications. This paper studies the welfare implication of tariffs and optimal tariffs in an environment that features firm heterogeneity, variable markups, and FDI. I find: (i) Tariffs endogenously affect firm entry level, producing different comparative statics in the short-run versus long-run. (ii) Variable markups generate multiple externalities in this economy, causing market outcome to differ from the socially optimum outcome systematically. Permitting tariff-jumping FDI can lower the domestic cutoff levels and reduces the misallocation in the economy. (iii) Free trade is not always socially optimal. If the domestic marginal cost cutoff is sufficiently high, a positive tariff can be welfare-improving since it encourages firm entry. The Nash equilibrium tariff level will also be higher than the socially optimal tariff. (iv) The interaction of variable markup and FDI generates novel welfare implications that are absent if consumers possess CES preference.
This paper characterizes the power dynamics of firms in both product and labor markets in Lithuania between 2004 and 2018. We first show that both markets are not perfectly competitive, as both price markups and wage markdowns are far from unitary and homogeneous. Interestingly, we unveil that the dynamics of these margins followed different patterns. On the one hand, both the dispersion and the economy-wide markup have increased, indicative of an increase in product market power. On the other hand, we document a decline in monopsony power, as both the heterogeneity and the aggregate level of markdowns have declined. Altogether, our results underline the importance of jointly analyzing product and labor markets when assessing firms' market power.
Using US firm-level data from 1985-2019, this paper investigates how the characteristics of matches between acquirers and targets of mergers and acquisitions (M&A) vary over the business cycle. We document several findings. (1) Acquirers are on average larger, more profitable, and in a stronger financial position than targets. (2) Targets are more innovative than acquirers, and (3) M&A targets during a recession have worse financial health but higher levels of innovation compared to M&A targets in booms. Our empirical evidence suggests that an economy may benefit from an economy may benefit from adjusting its antitrust stance over the business cycle.