Foreign Demand, Competition Strategy, and Export Markups: Evidence from Chinese Multi‐Product Exporters

Abstract Using Chinese microdata from 2000 to 2013, we document how demand shocks in export markets lead multi‐product exporters to adjust markups across products. We find that, in response to positive demand shocks, quality‐based competitive multi‐product firms increase product markups significantly, particularly for core products, whereas cost‐based competitive multi‐product firms respond by reducing product markups. The reason for this is that positive foreign demand affects markups through two opposite channels: pro‐innovative effects and pro‐competitive effects. Pro‐innovative effects are predominant among quality‐based competitive multi‐product firms, and these firms respond to positive foreign demand shocks by increasing product quality, prices, and markups. Pro‐competitive effects are predominant among cost‐based competitive multi‐product firms, and these firms respond to positive foreign demand shocks by lowering product cost, prices, and markups. We demonstrate the presence of these mechanisms empirically. The results imply that firms with different competition strategies should adopt different measures in response to foreign demand shocks.