Oligopoly and oligopsony in international trade

Abstract

We study the effects of international trade on the oligopsony power of firms in input markets. We build a theoretical model of international trade in which firms are oligopolists in the market for final goods and oligopsonists in the market for inputs. Consistent with evidence from the literature, firms' markups over unit costs rise with the level of oligopsony power and of oligopoly power. While trade liberalization decreases market power in one market, it has the opposite effect in the other. In particular, international competition between oligopolists in final goods markets causes oligopsony power to increase and oligopoly power to decline. In a simulation, we show that the increase in oligopsony power can more than offset the reduction in oligopoly power, resulting in a net increase in markups over unit costs.