Market Power in Input Markets: Theory and Evidence from French Manufacturing

Abstract

This paper documents the market power of large importing firms in foreign input markets, and evaluates its effects on the aggregate economy. I develop an empirical methodology to consistently estimate buyer power at the firm level. I apply the methodology to study imperfect competition in the market for foreign intermediate inputs, using longitudinal data on trade and production of French manufacturing firms from 1996-2007. My results show that buyer power is substantial, concentrated in key sectors, and it significantly correlates with the size and productivity of the firm. I then show that, in a simple general equilibrium model of production, buyer power has large distortionary effects, both at the firm and the economy level. This type of distortion could cost around 0.2% of total GDP in France. My analysis suggests that policies that spur import market integration can reduce the scope of buyer power and thus play a key role in stimulating aggregate production.