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Competition and Inflation – CHEN – November 2022 OECD discussion

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Competition and Inflation – CHEN – November 2022 OECD discussion

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This presentation by Natalie CHEN, Professor of Economics, University of Warwick, was made during the discussion “Competition and Inflation” held at the 139th meeting of the OECD Competition Committee on 30 November 2022. More papers and presentations on the topic can be found out at https://oe.cd/cinf

This presentation by Natalie CHEN, Professor of Economics, University of Warwick, was made during the discussion “Competition and Inflation” held at the 139th meeting of the OECD Competition Committee on 30 November 2022. More papers and presentations on the topic can be found out at https://oe.cd/cinf

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Competition and Inflation – CHEN – November 2022 OECD discussion

  1. 1. Competition and In‡ation Natalie Chen University of Warwick and CEPR OECD Roundtable Paris, 30 November 2022
  2. 2. Competition and In‡ation ² The recent surge in global in‡ation is predominantly driven by exter- nal shocks (pandemic-related global value chain disruptions and con‡ict Ukraine-Russia) ² Still, it is well established that competition matters for in‡ation ² Discuss how competition a¤ects in‡ation and emphasize two main aspects
  3. 3. Discussion 1. Emphasize how international competition impacts domestic competition and in turn prices and/or in‡ation through international trade (a) Import competition (in particular from low-wage countries) (b) Import tari¤s (c) Changes in exchange rates Supporting evidence based on empirical studies that investigate how inter- national competition a¤ects domestic prices or domestic in‡ation
  4. 4. Discussion 2. In‡ation (macroeconomic concept) is the growth rate of the CPI. But micro prices (at the product or …rm level) are informative (a) They inform us about aggregate prices and in‡ation (b) They allow us to distinguish between (estimated) markups and costs (De Loecker and Warzynski, 2012) i. The higher the markup, the stronger is market power and the lower the degree of competition ii. Changes in costs instead capture changes in e¢ciency (c) In understanding how competition a¤ects aggregate prices and in‡a- tion, they allow us to identify mechanisms that cannot be investigated using aggregate data
  5. 5. Import Competition Import competition (from low-wage countries) a¤ects the domestic CPI ² Cheaper imported (…nal) goods reduce the CPI (imported in‡ation) – Pass-through from import prices to domestic prices – Import component of the CPI varies between 10% and 41% (e.g., 30% for the UK, Gopinath, 2016) ² Cheaper imported intermediate inputs: domestic …rms produce at a lower cost and reduce their prices (e¢ciency) ² Imports have a pro-competitive e¤ect and reduce the markups of domestic producers (competition)
  6. 6. Evidence of Pro-Competitive E¤ects ² Chen et al. (2009). Trade openness of EU countries exerts a competitive e¤ect on in‡ation, with prices and markups falling and productivity rising (costs falling). Sectoral data only ² Carluccio et al. (2022). Imports of consumption goods from low-wage countries lower domestic producer price in‡ation for French manufactur- ing …rms. Competition e¤ect (imported inputs are excluded) ² Prices: Amiti et al. (2020). In‡ation: Auer et al. (2013), Auer and Fischer (2010), Cardoso and Soares Esteves (2008), Kamin et al. (2006), Mac Coille (2008). Markups: Feenstra and Weinstein (2018)
  7. 7. Import Tari¤s ² Similarly to an increase in import competition, a fall in import tari¤s makes imports cheaper. Pass-through goes from tari¤s to import prices and then to domestic prices ² Recent evidence for the US-China trade war – Amiti et al. (2019), Fajgelbaum et al. (2020): complete pass-through of tari¤ increases into US import prices – Cavallo et al. (2021): the tari¤s were almost fully passed through to the prices paid by importers. But the impact of tari¤s on consumer prices is mixed. Only some products have seen sharp price increases, suggesting that retail margins have fallen – Flaaen and Pierce (2019), Flaaen et al. (2020)
  8. 8. Changes in Exchange Rates ² The literature on exchange rate pass-through investigates how import prices (that feed into domestic prices) change with exchange rates ² Depending on the magnitude of pass-through, – A domestic appreciation makes imports cheaper: import less in‡ation (…nal goods) and produce at a lower cost (intermediate inputs) – No evidence for the markups of domestic producers. But domestic exporters adjust markups to foreign markets (“pricing-to-market”) ² Pass-through is low. But it is larger once we account for the fact that global trade is predominantly invoiced in USD and that …rms react to the USD exchange rate as opposed to the bilateral exchange rate
  9. 9. Exchange Rate Pass-Through ² Amiti et al. (2014), Berman et al. (2012), Gopinath (2016), Gopinath and Rigobon (2008): study import price in‡ation. Auer et al. (2021) extend to CPI in‡ation ² Chen et al. (2022), Gopinath et al. (2020), Gopinath et al. (2010): import price in‡ation accounting for the currency of invoicing ² For evidence on pricing-to-market, see Krugman (1987), Knetter (1989), or more recently Corsetti et al. (2022)
  10. 10. Disaggregated Price Data ² Macro data: on average competition reduces prices and in‡ation ² Micro data: in some cases, competition can also induce higher prices – Following trade liberalization, domestic …rms can escape the increase in competition by upgrading the quality of the goods they produce – Higher quality goods have higher markups and higher marginal costs and therefore higher prices (Chen and Juvenal, 2022) – The price e¤ect depends on the relative changes in markups vs costs (if …rms can source cheaper foreign inputs following trade liberalization) ² Amiti and Khandelwal (2013), De Loecker et al. (2016), Medina (2022), Piveteau and Smagghue (2019)
  11. 11. Conclusions ² How international competition a¤ects domestic prices and in‡ation ² To foster international competition which in turn reduces prices and in‡a- tion, it is important to – Be open to international trade – Reduce import tari¤s (or any other type of trade friction) – Acknowledge that exchange rate changes a¤ect prices and in‡ation ² Using disaggregated price data can provide further insights into how com- petition a¤ects prices and in‡ation. Understanding the drivers of price changes (i.e., markups vs costs) is also crucial

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