Empirical work has drawn attention to the high degree of productivity differences within industries, and its role in resource allocation. This paper examines the allocational efficiency of such markets. Productivity differences introduce two new sources of potential inefficiency: selection of the right distribution of firms and allocation of the right quantities across firms. We show that these considerations impact welfare and policy analysis. Market power across firms leads to distortions in resource allocation. Demand-side elasticities determine how resources are misallocated and when increased competition from market expansion provides welfare gains.

How does a country’s productivity growth a¤ect worldwide real incomes through international trade? In this paper, we take this classic question to the data by measuring the spillover e¤ects of China’s productivity growth. Our framework features traditional terms-of-trade e¤ects and new trade home market e¤ects as suggested by the theoretical literature and works from a reference point which perfectly matches industry-level trade. Focusing on the years 1995 to 2007, we …nd that the cumulative welfare e¤ect on individual regions ranges between-1.2 percent and 3.6 percent and only 3.0 percent of the worldwide gains of China’s productivity growth accrue to the rest of the world.

This paper examines how prices, markups and marginal costs respond to trade liberalization. We develop a framework to estimate markups from production data with multi-product rms. This approach does not require assumptions on the market structure or demand curves faced by rms, nor assumptions on how rms allocate their inputs across products. We exploit quantity and price information to disentangle markups from quantity-based productivity, and then compute marginal costs by dividing observed prices by the estimated markups. We use India's trade liberalization episode to examine how Not surprisingly, we rms adjust these performance measures. nd that trade liberalization lowers factory-gate prices. However, the price declines are small relative to the declines in marginal costs, which fall predominantly because of the input tari liberalization. The reason is that rms o set their reductions in marginal costs by raising markups. This limited pass-through of cost reductions attenuates the reform's impact on prices. Our results demonstrate substantial heterogeneity and variability in markups across rms and time and suggest that producers bene ted relative to consumers, at least immediately after the reforms. To the extent that higher rm pro ts lead to the new product introductions and growth, long-term gains to consumers may be substantially higher.