Aggregate Markup Research Articles

Prices, markups and wages: inflation and its distributive consequences in Spain, 2021-2023

This article analyses the recent inflationary experience in Spain (2021-2023), focusing on the functional income distribution, the evolution of markups and real wages, and the economic policies implemented. We rely on the conflict theory of inflation and touch upon recent debates on of sellers' inflation. Using the Observatory of Firms’ Margins, we confirm an increase in aggregate markups. Nevertheless, the main factor explaining price increases is firms' pass-through of higher input costs to protect their profits. The direct effect of markup increases has been quantitatively less important, and that of unit labour costs negligible. Therefore, inflation has had huge distributional consequences and there is space for non-inflationary wage increases. While fiscal and regulatory measures have effectively curbed the inflation rate having an expansive effect, restrictive monetary policy is inappropriate and costly.

Sellers' Inflation and Distributive Conflict: Lessons from the Post-COVID Recovery

ABSTRACT The paper offers a post-Keynesian explanation of the soaring inflation experienced during the post-COVID recovery, coherent both at the microeconomic and macroeconomic levels. The microeconomic argument is rooted on the premise that price-making firms consider both their costs and their desired share of profits when setting prices. To defend profit margins in the aftermath of the pandemic, the initial cost-push shock was passed to consumers through higher prices; in a second phase, some firms, particularly in more highly concentrated and systemically significant sectors, benefited from the post-pandemic permissive pricing environment to increase their price mark-ups, leading to temporary profit-fueled inflation following the cost-push shock. This microeconomic explanation is compatible with the macroeconomic notion of a stable inflation barrier. For a given quantity of real output, it is shown that if profit earners defend their share of income following a cost-push, this will produce a one-time price increase, with inflation becoming more persistent if the target adapts endogenously — i.e., if the aggregate mark-up changes. The paper contrasts the notion of a wage-price spiral with that of a profit-price sink, arguing that sellers' inflation is a real — albeit temporary phenomenon.

Monetary Policy and Welfare with Heterogeneous Firms and Endogenous Entry

AbstractThis paper studies monetary policy and welfare in a sticky wage New Keynesian model with heterogeneous firms and endogenously variable markups. We show that stabilizing nominal wages is optimal only when product creation is based on an instantaneous zero‐profit condition and when the aggregate markup is constant. A constant markup requires strong selection effects generated by a Pareto firm‐level productivity distribution. When product creation is based on a dynamic zero‐profit condition optimal monetary policy accounts for the distribution of firms and the welfare loss from stabilizing nominal wages is between and 0.2% of steady‐state consumption.

Increasing returns to scale and markups

I estimate aggregate and industry-specific elasticities of scale and markups for the U.S. economy over the period from 1980 to 2019 using data on publicly traded companies. I apply Olley–Pakes and Ackerberg–Caves–Frazer estimation methods and find that the aggregate elasticity of scale for the U.S. economy is 1.1 and has been rising. The elasticity of scale in turn serves as an input for calculating industry markups. Increasing returns to scale help explain observed increases in markups over the last decades for broad sectors of the economy. My estimate of 1.2 for the aggregate markup is significantly lower than the estimate of 1.6 found in recent literature. The large disparity in markup estimates stems from differences in the treatment of fixed and variable costs and the methodological approach to the calculation of markups.

Structural gravity and the gains from trade under imperfect competition: Quantifying the effects of the European Single Market

The structural gravity model is the workhorse model in international trade to estimate the drivers of trade costs. We propose a new gravity estimation procedure that allows us to disentangle exogenous trade costs and endogenous aggregate markups under oligopoly. Our method can be easily implemented in standard gravity data sets, and we illustrate it by analyzing the competition and welfare effects of the European Single Market. We find that abolishing the European Single Market would increase domestic aggregate markups in EU member countries by 2 to 6 percent. Welfare effects of trade liberalization are larger due to changes in competition among domestic and foreign firms. Our findings highlight that evaluations of trade policy changes and trade cost reductions should also consider their effects on competition.

The rise of superstar firms in the United States: The role of global sourcing

Recent trends of global sourcing, market concentration, and aggregate markup have garnered increased attention. This paper examines the impact of global sourcing of inputs on market structure and markup changes in the United States. We develop a theoretical model with heterogeneous firms that suggests only the most-productivity firms will self-select to source inputs overseas, resulting in an increase in the markups and market shares of these leading firms, while lower-productivity firms are crowded out. Based on the theoretical analysis, aggregate markup rises due to both the within-firm markup adjustments and market share concentration among leading firms. We then provide empirical evidence supporting our theoretical predictions, analyzing the effect of imported inputs on markup adjustments, market shares, and industrial markups in the United States over the past four decades. Our results highlight the importance of firms’ self-selection effect in the global sourcing market and its impact on market outcomes. Failing to account for this influencing channel could lead to an underestimation of the contribution of input globalization to the rise of markup and other market consequences.

Aggregate Markup and Its Impact on Income Inequality: Country Panel Evidence

This study investigates the relationship between market power, as measured by aggregate markups, and income inequality across 34 countries between 1991 and 2016. We find that market power is positively associated with income inequality in developing countries, while the relationship between markups and income inequality in advanced economies is more nuanced and statistically insignificant. Our study reveals that a higher collective bargaining rights mitigate the impact of market power on income inequality, emphasizing the importance of robust worker protection systems for fostering a more equitable labor market environment.

The Darwinian Returns to Scale

Abstract How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize changes in welfare and decompose changes in allocative efficiency into three different effects: (1) reallocations across firms with heterogeneous price elasticities due to intensifying competition, (2) reallocations due to the exit of marginally profitable firms, and (3) reallocations due to changes in firms’ markups. Whereas the second and third effects have ambiguous implications for welfare, the first effect, which we call the Darwinian effect, always increases welfare regardless of the shape of demand curves. We nonparametrically calibrate demand curves with data from Belgian manufacturing firms and quantify our results. We find that mild increasing returns at the microlevel can catalyze large increasing returns at the macrolevel. Between 70 and 90% of increasing returns to scale come from improvements in how a larger market allocates resources. The lion’s share of these gains are due to the Darwinian effect, which increases the aggregate markup and concentrates sales and employment in high-markup firms. This has implications for policy: an entry subsidy, which harnesses Darwinian reallocations, can improve welfare even when there is more entry than in the first best.

Endogenous Firm Competition and the Cyclicality of Markups

Abstract We show that the cyclicality of output growth is a sufficient predictor for the cyclicality of markups in models that micro-found variable markups through dynamic trade-offs. We use data on markups from the U.S. as well as survey data on firms' expectations from New Zealand to test the predictions of these models and find evidence in favor of their mechanisms. Finally, we study the implications of these mechanisms for cyclicality of markups in a calibrated general equilibrium model. In particular, we find that the degree of hump-shaped response in output is crucial for the direction of aggregate markup cyclicality.

International Trade and Innovation Dynamics with Endogenous Markups

Abstract We argue that the recent increases in market concentration and markups are partly due to an ‘innovation feedback effect’ of globalisation. Lower trade costs increase innovation incentives for global firms. As the winners of the ensuing innovation race increase their technological advantage, concentration and markups rise. We develop an endogenous growth model capturing this effect and calibrate it to US manufacturing data. We find that the increase in trade between 1989 and 2007 raised the aggregate markup by 3.5 percentage points. This is entirely due to innovation: without the innovation response, markups would have fallen by 4 percentage points.

Accounting for the Effect of Household Debt on Economic Growth: The Role of Markup Dynamics

This paper investigates the effect of household debt on aggregate markup, and consequently real GDP by using the local projection method found in Jordà (2005). We show that markup dynamics play a contributing role in examining the effect of household debt on real GDP. Our main empirical results are as follows: (1) An increase in household debt is positively related with aggregate markup. (2) Household consumption decreases as markup rises. (3) With the positive association between markup and household debt, real GDP and household consumption decrease in response to positive household debt shock.

Markups and Financial Shocks

Abstract This paper analyses the impact of financial frictions on markup adjustments at the firm level. We use a rich panel data set that matches information on banking relationships with firm-level data. By relying on insights from recent contributions in the literature, we obtain exogenous credit supply shifters and markups that are both firm specific and time varying. We uncover new findings at this level. In particular, firms more exposed to liquidity risks tend to raise markups in response to negative bank-loan supply shocks, while less exposed firms generally reduce them. Further empirical analyses suggest that our findings are mostly consistent with models featuring a sticky customer base, where financially constrained firms have an incentive to raise markups in order to sustain liquidity without losing too many customers. Our results have important economic implications regarding the cyclicality of the aggregate markup.

Credit Expansion and Markups

This article documents new empirical facts about the effects of credit expansion on the aggregate markup and markup dispersion in the United States. We use U.S. macroeconomic data and Jordà’s local projection and single-equation estimation methods. 

Accounting for the Effect of Government Spending on Income Inequality: Role of Markup Dynamics

This paper examines the effect of government spending on the markups and income inequality by using a local projection method. We show that markup dynamics play a crucial role in explaining the effect of government spending on income inequality. Our main empirical results are as follows: (i) An increase in government purchases is positively related to the aggregate markup in the developing and closed economies. (ii) Through this positive relationship of markup with fiscal policy, the positive government expenditure shock raises the income inequality in the developing and closed economies. The validity of these results is confirmed by robustness checks.

AGGREGATE MARKUP DYNAMICS: EVIDENCE FROM CHINA

Unlike previous studies that focus on the change of firm-level markup, this study focuses on the change of industry-level aggregate markup. From the data of China’s manufacturing firms in 1999–2007, this study exploits the dynamic change of aggregate markup by using the decomposition method which is proposed by Melitz and Polanec (2015). The result shows that China’s manufacturing aggregate markup has an upward trend during the sample period, which mainly comes from the contribution of surviving firms. On the contrary, the contribution of entering and exiting firms to the aggregate markup is negative. Further analysis shows that trade liberalization is one of the reasons to promote the increase of China’s manufacturing aggregate markup. This study provides a new perspective for understanding the dynamic change of the aggregate markup.

Demand, Supply And Markup Fluctuations

Abstract Markup cyclicality has been central for debating policy effectiveness and understanding business cycle fluctuations. However, measuring the cyclicality of markups is as important as understanding the microeconomic mechanisms underlying that cyclicality. The latter requires measurement of firm-level markups and separating supply from demand shocks. We construct a novel dataset with detailed (multi-) product-level prices for individual firms. By estimating a structural model of supply and demand, we evaluate how companies adjust prices and marginal costs as a response to shocks. We find that price markups respond positively to supply shocks and negatively to demand shocks. The mechanism explaining the observed markup behaviour is the same for both shocks: incomplete pass-through of changes along the marginal cost curve to price adjustments. These observed price and output responses are consistent with dynamic demand considerations. Finally, we use our estimated shocks to show how aggregate markup fluctuations in the sample period are mostly explained by aggregate demand shocks.

Decomposing the Rise in Markups

An increase in the aggregate markup can be due to both firm-level markups increasing and economic activity reallocating toward high-markup firms. I show that standard decomposition methods estimate a non-zero reallocation effect even when the allocation does not change and that this bias is potentially large. In opposite to the existing literature, I find that reallocation does not seem to be the major driver of the rise in markups among Compustat firms.

Mergers and Acquisitions and the Aggregate Markup

Mergers and Acquisitions and the Aggregate Markup

Empirical investigation into market power, markups and employment

In this paper I use the production function approach popularized by De Loecker et al. (2020) to analyze the evolution of market power in Slovakia and some of its micro and macro implications. In contrast to other studies, I calculate markups from both value added and sales and empirically test whether some of the global trends in market power can be seen in Slovak firm level data as well. I find that the markups in Slovakia in fact declined since 2010, both in terms of value added and sales. Although the decrease in sales markups is negligible, the value added aggregate markup declined by 25% from 2.35 in 2012 to 1.78 in 2018. Value added markups tend to be higher for relatively value-added larger firms and they are also higher in larger sectors. Smaller firms (size indicated by number of employees) tend to have higher markups. It seems that a typical high markup firm is relatively small (in terms of number of employees) but produces relatively larger output. Correlations between markups and various measures of profitabality show that there is indeed a relationship between markups and market power. Markups strongly correlate with profits and they do not significantly react to changes in costs. Markups in Slovakia evolve in excess of marginal costs. Slovak firm data shows that markups are also inversely associated to labor shares. Correlation is statistically strong and empirically well established.

Market Power and Labor Share

Secular trends in market power and labor share have important implications for inequality and allocative efficiency. Studying them requires comprehensive and detailed firm-level data spanning several decades. For that purpose, we leverage a novel and detailed database on the universe of French firms between 1984 and 2016, that we use to document a rise in concentration in France since the beginning of the 1990s. Despite a relative stability of the aggregate labor share, we show that firms with lower labor shares have been gaining market shares. As low labor share firms also tend to be larger, this market share reallocation has been stronger in industries where concentration increased the most. We rely on markups as proxies of firm-level market power, and on a flexible production function that allows the identification of firm-specific output elasticities and markups. We find that the markup of the typical firm has decreased, but the reallocation of market shares toward larger firms contributed to an increase of the aggregate markup. Finally, we show how taking into account reallocation across firms is essential to understand how the aggregate market power evolution has shaped the dynamics of the aggregate labor share in France.