Endogenous Markups and Trade Elasticities
Abstract: We develop a search model of international trade where buyers allocate costly cognitive attention across suppliers. Suppliers exploit the cost of shifting attention to extract markups, giving dominant firms the cushion to absorb cost shocks while marginal suppliers pass them on. Validating this mechanism with U.S. tariff data, we estimate a highly concentrated U.S. domestic market. Consequently, while targeted tariffs spur offshore substitution, blanket tariffs force buyers toward captive domestic monopolies. Incumbents’ growing market power raises markups and halves the aggregate macro elasticity relative to micro estimates. Integrating endogenous market-power-dependent elasticity along the path to autarky more than doubles the U.S. gains from trade compared with standard constant-elasticity predictions.
DOI: https://doi.org/10.24149/wp2632