How do global production networks and market structure interact to shape the welfare effects of trade and competition policy? We develop a model with two-sided firm heterogeneity, matching frictions, and imperfect supplier competition. More productive buyers match with more suppliers, inducing tougher competition among them, lower input costs, and higher profits. Entry upstream thus benefits primarily high-productivity buyers, while lower trade or matching costs favor mid-productivity buyers. Reduced-form evidence confirms that larger French and Chilean firms import higher quantities at lower prices as more Chinese suppliers enter, and that suppliers charge diversified buyers lower markups. We estimate the model by adapting recent methods for combinatorial, discrete-choice problems. Counterfactuals reveal that the interaction of endogenous networks and markups significantly amplifies the gains from policies that facilitate supplier entry or firm matching, as well as from modern trade agreements that combine trade cost cuts with such policies.

This paper examines trade intermediation to unpack the firm attributes and matching costs that govern firm-to-firm production networks. Exploiting rich customs data for Chile, we show that exporters of all sizes (i) sell direct, through intermediaries or both; (ii) mix trade modes across buyers; and (iii) set lower prices on intermediated flows. We rationalize these facts in a model of network formation with suppliers of heterogeneous productivity and matchability, buyers of heterogeneous productivity, and intermediaries that reduce matching costs for a brokerage fee. Empirical evidence on trade activity across firms and countries corroborates the model, and informs how logistics, customs efficiency, and formal and informal contracting shape network costs. Model estimation reveals that intermediaries lower matching costs by 26% on average, and ignoring buyer heterogeneity would bias this estimate upwards by 60%. Moreover, sellers’ attributes are negatively correlated. This amplifies the welfare gains from intermediation, since intermediaries widen and deepen production networks primarily by linking highly productive sellers with low matchability to smaller buyers.

I study the role of trade intermediaries in mitigating supply chain risk. Chilean intermediated imports rise and fewer firms import directly when origin-product risk increases. Firm-to-firm transactions reveal that intermediaries maintain larger and more stable supplier networks, while only larger producers diversify suppliers. I rationalize firms’ sourcing strategies in a model with matching costs and insecure supplier links. Intermediation reduces expected input costs despite brokerage fees, allowing producers to secure inputs without diversifying themselves. A 10 percent increase in global risk lowers operating profits by 3.5 percent and raises consumer prices by 0.9 percent. These losses nearly double without intermediation.

How do firms grow in global markets when maintaining relationships is costly? Using firm-to-firm customs data from Chile, we show that growing exporters systematically replace smaller buyers with larger ones, a process we term customer uptrading. A formal decomposition reveals that uptrading, rather than upselling to existing customers or expanding the number of buyers, is the main driver of exporters’ growth. Exploiting variation in direct flight availability, we find that exporters are less likely to drop buyers when better connected to them, linking uptrading to the upkeep costs of managing trade relationships. We rationalize these findings with a dynamic model of network formation in which firms engage in costly customer search and actively decide which relationships to add, keep or sever, taking into account the marginal change in sales and upkeep costs. More productive firms invest more in search in order to expand and upgrade their customer portfolios, but relational upkeep costs limit further expansion. As a result, firms search more than is typically inferred from aggregate data, and previous search cost estimates may be biased upward. This underscores the complementary role of managerial practices in facilitating trade.