Differences in Price Markups between Exporters and Non-Exporters

Abstract

This paper builds on a simple model of Cournot competition with differentiated costs to study differences between exporters and non-exporters in terms of their domestic price markup and output shares and considering the case when firms face capacity constraints in the short-run. In the absence of capacity constraints, the model confirms the finding in previous research of a higher domestic markup for exporters than for non-exporters and finds that, in equilibrium, exporters who also produce for the domestic market have higher shares of total domestic output than non-exporters. These results hold regardless of whether exporters are able to exercise market power in export markets. With capacity constraints, exporters are also found to charge a higher domestic markup than non-exporters, but they may not necessarily have larger shares of total domestic output since they export at the expense of selling less at home. Firms in the Ghanaian sample also seem to fit the capacity constraints model better since we observe large exporting firms who produce little or nothing for the domestic market. The prediction that exporters have higher domestic markups is then tested empirically with a panel of manufacturing firms from Ghana using panel data techniques and a Hall-type (production function) approach to estimating markups. Due to endogeneity concerns, results from using instrumental variables (IV) and general method of moments (GMM) estimation techniques are also obtained. The main results suggest Ghanaian exporters have a domestic markup between 7.7 and 10.2 percentage points higher than non-exporters. Exporters also seem to face intense competition in export markets outside Africa, where they are not able to charge a positive markup, while in African markets competition may not be as tough.