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arxiv: 2507.12848 · v2 · submitted 2025-07-17 · 💰 econ.GN · q-fin.EC

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

Alviarez Vanessa , Fioretti Michele , Kikkawa Ken , Morlacco Monica This is my paper

Pith reviewed 2026-05-19 04:54 UTC · model grok-4.3

classification 💰 econ.GN q-fin.EC
keywords firm-to-firm tradetariff pass-throughbargaining poweroligopolyoligopsonymarket powerU.S. importssupply chains
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The pith

Cost changes rather than markup adjustments explain most incomplete pass-through of 2018 U.S. tariffs in firm-to-firm trade.

A machine-rendered reading of the paper's core claim, the machinery that carries it, and where it could break.

The paper builds a structural model of bargaining between firms that incorporates both seller oligopoly power and buyer oligopsony power. It derives closed-form expressions for bilateral markups and tariff pass-through that depend only on two share statistics: how much a supplier accounts for a buyer's total purchases and how much a buyer accounts for a supplier's total sales. Estimation using detailed U.S. import records shows importers hold substantial bargaining power and export supply curves are steep. These features together imply that direct cost shocks drive the observed price responses to tariffs, rather than changes in markups.

Core claim

The model yields analytical expressions for bilateral markups and pass-through based on two sufficient statistics: the supplier's share in the buyer's purchases and the buyer's share in the supplier's output. Using U.S. import data, the authors find substantial importer bargaining power and steep export supply curves. These primitives imply that cost changes, rather than markup adjustments, dominate pass-through, accounting for the bulk of incomplete pass-through of the 2018 U.S. tariffs and its heterogeneity across buyer-supplier links.

What carries the argument

Two share-based sufficient statistics that capture bilateral market power: the supplier's share in the buyer's purchases and the buyer's share in the supplier's output.

If this is right

  • Cost changes dominate markup adjustments in determining how tariffs translate into final prices.
  • The same primitives generate the observed variation in pass-through rates across different buyer-supplier relationships.
  • Strong importer bargaining power limits exporters' ability to raise prices when their costs rise.
  • Steep supply curves amplify the transmission of cost shocks into buyer prices.

Where Pith is reading between the lines

These are editorial extensions of the paper, not claims the author makes directly.

  • The same share statistics could be used to predict pass-through in non-tariff cost shocks such as exchange-rate movements or input-price spikes.
  • Policies that alter bargaining positions between specific pairs of firms could change aggregate price responses even if average market shares stay fixed.
  • Extending the static shares to include inventory or contract-length data might reveal whether the dominance of cost channels persists over longer horizons.

Load-bearing premise

The structural model assumes that the two share-based sufficient statistics fully capture bilateral market power and that the estimated bargaining parameters and supply slopes are identified separately from the pass-through outcomes they are later used to explain.

What would settle it

Direct evidence on whether measured cost changes account for the majority of price increases after the 2018 tariffs once markup variation across individual buyer-supplier pairs is held constant.

read the original abstract

We develop and estimate a structural model of bargaining in firm-to-firm trade to study the determinants of tariff pass-through. The model features oligopoly and oligopsony power and yields analytical expressions for bilateral markups and pass-through based on two sufficient statistics: the supplier's share in the buyer's purchases and the buyer's share in the supplier's output. Using U.S. import data, we find substantial importer bargaining power and steep export supply curves. These primitives imply that cost changes, rather than markup adjustments, dominate pass-through, accounting for the bulk of incomplete pass-through of the 2018 U.S. tariffs and its heterogeneity across buyer-supplier links.

Editorial analysis

A structured set of objections, weighed in public.

Desk editor's note, referee report, simulated authors' rebuttal, and a circularity audit. Tearing a paper down is the easy half of reading it; the pith above is the substance, this is the friction.

Referee Report

2 major / 2 minor

Summary. The paper develops a structural model of bargaining in firm-to-firm trade that incorporates both oligopoly and oligopsony power. It derives analytical expressions for bilateral markups and tariff pass-through as functions of two share-based sufficient statistics (the supplier's share in the buyer's total purchases and the buyer's share in the supplier's total output). Estimation on U.S. import data yields substantial importer bargaining power and steep export supply curves; these primitives are then used to decompose the incomplete pass-through of the 2018 U.S. tariffs, attributing the bulk of incompleteness and its cross-link heterogeneity to cost changes rather than markup adjustments.

Significance. If the identification of bargaining power and supply slopes is shown to be independent of the 2018 tariff variation and pass-through outcomes, the paper would provide a useful contribution to the tariff pass-through literature by supplying an explicit two-sided market-power channel and a transparent decomposition based on observable shares. The availability of closed-form expressions for markups and pass-through is a methodological strength that facilitates the decomposition exercise.

major comments (2)
  1. [§4] §4 (Identification and Estimation): The central claim that cost changes dominate pass-through rests on the estimated bargaining parameters and supply slopes. The manuscript must demonstrate that the moments or instruments used to identify these primitives are independent of the 2018 tariff shocks and observed pass-through rates across buyer-supplier links; otherwise the decomposition risks being partly mechanical. The abstract and identification discussion should state the exclusion restrictions and any pre-tariff identifying variation explicitly.
  2. [§5] §5 (Pass-through Decomposition): The claim that the two share-based sufficient statistics fully summarize bilateral market power and thereby determine the relative importance of cost versus markup channels needs a direct test or robustness check against alternative specifications that allow for additional channels (e.g., multi-product effects or dynamic adjustment). Without this, it is unclear whether the dominance of cost changes is robust or an artifact of the maintained sufficient-statistic assumption.
minor comments (2)
  1. [Abstract] The abstract would benefit from a one-sentence statement of the main identifying assumption that separates the estimation of primitives from the subsequent pass-through decomposition.
  2. [§2] Notation for the two share statistics should be introduced once and used consistently in both the theoretical expressions and the empirical tables.

Simulated Author's Rebuttal

2 responses · 0 unresolved

We thank the referee for the constructive and detailed comments. We address each major comment below and indicate the revisions we plan to incorporate.

read point-by-point responses

  1. Referee: [§4] §4 (Identification and Estimation): The central claim that cost changes dominate pass-through rests on the estimated bargaining parameters and supply slopes. The manuscript must demonstrate that the moments or instruments used to identify these primitives are independent of the 2018 tariff shocks and observed pass-through rates across buyer-supplier links; otherwise the decomposition risks being partly mechanical. The abstract and identification discussion should state the exclusion restrictions and any pre-tariff identifying variation explicitly.

    Authors: We agree that explicit clarification of the identifying variation is necessary to rule out mechanical relationships. In the revised manuscript we will add a dedicated paragraph in the identification section (and update the abstract) stating the exclusion restrictions: the bargaining parameters and supply slopes are identified from pre-2018 variation in buyer-supplier purchase and sales shares together with other model-implied moments that do not rely on tariff changes or realized pass-through rates. We will also report the exact pre-tariff sample periods and moment conditions used for estimation to make this independence transparent. revision: yes

  2. Referee: [§5] §5 (Pass-through Decomposition): The claim that the two share-based sufficient statistics fully summarize bilateral market power and thereby determine the relative importance of cost versus markup channels needs a direct test or robustness check against alternative specifications that allow for additional channels (e.g., multi-product effects or dynamic adjustment). Without this, it is unclear whether the dominance of cost changes is robust or an artifact of the maintained sufficient-statistic assumption.

    Authors: The model is derived under the maintained assumptions of single-product, static Nash bargaining, which deliver the two share-based statistics as sufficient. We will add a new robustness subsection that (i) discusses the likely direction of bias if multi-product or dynamic considerations were present and (ii) reports supplementary estimates that split the sample by product scope and by relationship duration to provide indirect evidence on these channels. A full re-estimation under an extended multi-product or dynamic model lies outside the scope of the current paper but is noted as a valuable avenue for future work. revision: partial

Circularity Check

0 steps flagged

No significant circularity: primitives estimated separately then used for decomposition

full rationale

The paper first derives analytical expressions for bilateral markups and pass-through from a structural bargaining model that depends on two share-based sufficient statistics measured directly from U.S. import data. It then estimates importer bargaining power and export supply slopes as primitives from the same dataset. These estimated values are subsequently inserted into the model to decompose observed tariff pass-through into cost versus markup components. Because the abstract and description present the estimation step as producing independent primitives whose implications for pass-through are then derived, and no evidence is given that pass-through moments themselves are used to fit the bargaining or slope parameters, the derivation chain remains self-contained rather than reducing to its own fitted inputs by construction.

Axiom & Free-Parameter Ledger

1 free parameters · 2 axioms · 0 invented entities

The model rests on standard assumptions about Nash bargaining and oligopolistic/oligopsonistic competition plus the claim that two share statistics are sufficient; no new entities are introduced.

free parameters (1)
  • bargaining power and supply slope parameters
    Estimated from U.S. import data to match observed trade patterns and then used to compute pass-through.
axioms (2)
  • domain assumption Firms engage in bilateral Nash bargaining over prices
    Core modeling choice that delivers the closed-form markups and pass-through expressions.
  • domain assumption The supplier's share in buyer purchases and buyer's share in supplier output are sufficient statistics for bilateral market power
    Stated as the basis for analytical expressions.

pith-pipeline@v0.9.0 · 5644 in / 1417 out tokens · 39049 ms · 2026-05-19T04:54:52.357233+00:00 · methodology

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Reference graph

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