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The paper investigates how endogenous markups affect the ability of policy reforms to play on international competitiveness. In a two-country model where trade costs allow for international market segmentation, we show that the endogenous pricing-to-market behavior of firms plays as important transmission channels of the policies. By strengthening the degree of competition between firms, a product market deregulation at Home leads to a reduction in the domestic markups, which tends to improve international competition of the Home country. Conversely, domestic firms take the opportunity of the reduction in the labor cost induced by the competitive tax policy, to increase their markups. Markups' variability also affects the normative implications of the reforms. This points out the importance of taking into account the endogenous pricing-to-market behavior if willing to correctly evaluate the overall effects of the reforms.
