Competition, Market Structure and the allocation of resources.

Economists have long advocated free trade. Policies aimed at reducing barriers to international trade have the potential to deliver significant gains to consumers through lower prices and increased product variety. In the academic literature these gains typically come about through the cost channel: a more efficient allocation of resources at the firm, industry, or aggregate economy level leads to lower costs that are passed through to consumers in the form of lower prices. While this mechanism is unquestionably important, it abstracts from another channel that features prominently in the public debate: the potential that trade reduces firms’ market power by exposing them to more competition, forcing them to lower their markups and ultimately their prices. It is completely absent in traditional models of trade that assume either perfect or constant markups that are invariant to policy. The results from the project will fill in this gap by examining the total effect on prices, costs and thus markups. The second part of the project focuses on the impact of market power on resource allocation. The study of the allocative effects of cartels will generate new perspective in evaluating policy responses and conduct remedies, both in economics, and in the legal profession. Moreover, the use of novel data on cartels and oil production open new perspectives on the effect of different institutional environments, such as permitting cartels, and their effects on market outcomes.