Two-Sided Market Power in Firm-to-Firm Trade

Abstract

Firms in global value chains (GVCs) are granular and exert bargaining power over the terms of trade. We show that these features are crucial to understanding the well-established variation in prices and pass-through across importers and exporters. We develop a novel theory of prices in GVCs, which tractably nests a wide range of bilateral concentration and bargaining power configurations. We test and evaluate the models predictions using a novel dataset merging transaction-level U.S. import data with balance sheet data for both U.S. importers and foreign exporters. Our pricing framework enhances traditional frameworks in the literature in accurately predicting price changes following a tariff shock. The results shed light on the role of firms in determining the tariff pass-through onto import prices.