Export Destination Characteristics and Markups: The Role of Country Size

Abstract

Besides exhibiting substantial heterogeneity across firms or products of different quality, markups can vary within a firm across products of the same type that are sold to different markets. This implies that part of the observed markup heterogeneity is driven by differences in market characteristics. Openness to international trade plays a crucial role in this heterogeneity by allowing firms to operate in multiple markets simultaneously. This paper aims to assess the variation in markups across export destinations of different characteristics, with a particular focus on country size. The markup variation is estimated through an export demand specification using product–firm–country matched data from Luxembourg, where prices and quantities are observed separately. The results show that markups for products exported to larger destinations are significantly lower. In addition to destination size, markups are found to vary with the export destination's productivity advantage, distance, strictness of tariffs, EU membership status and richness. Exporters’ markups also vary significantly with firm age but not with firm size.