Charge Higher Markups Research Articles

Disclosure, Patenting, and Trade Secrecy

AbstractPatent applications often reveal proprietary information to competitors, but does such disclosure harm firms or also benefit them? We develop and empirically support a theory showing that when firms patent enhancements to incumbent, nondisruptive technologies, they can cooperate more easily on these technologies, increasing their profitability. The downside of cooperating on nondisruptive technologies is that the investment in and commitment to disruptive technologies decline. To improve their commitment to disruptive technologies, some firms rely more on trade secrecy. We provide empirical support for these predictions. We document that after a patent reform that made information about patent applications widely accessible, firms cooperate more and charge higher markups. Furthermore, the nature of patented innovation has changed, with the proportion of nondisruptive patents increasing substantially. Finally, while some firms start patenting more, others patent less and rely more on trade secrecy, with the response depending on the attractiveness of firms' innovation prospects.

Determinants of export pricing at the firm-level: evidence from Egypt

The study explains the export pricing behaviors of Egyptian firms using detailed customs data and high-dimensional fixed effects. Firstly, it finds that more productive firms (as proxied by firms’ importation of intermediate inputs and capital goods) charge higher export prices which are correlated with higher revenues, providing an evidence for competition in quality, rather than price, amongst firms. Secondly, firms with more destinations charge a higher price for their exported products and a wider price range across markets. Thirdly, firms charge higher prices for more distant and richer destinations, whereas they charge lower prices for larger-sized and less central ones. This could be explained by variable mark-ups across destinations, where higher mark-ups are set in more distant, richer, smaller (less competitive), and more central destinations. It could also indicate that higher quality product versions are sent to more distant destinations (Alchian-Allen or selection effects) and richer ones (demand effect). Lastly, firms charge higher prices for destinations with a larger prevalence of technical measures or those imposing specifically restrictive ones, potentially reflecting an adverse effect of these measures on the number of exporting firms, allowing survivors to charge higher mark-ups. Alternatively, this could reflect firms’ quality upgrading in compliance with such measures.

Sequential search and firm prominence

We explore the role of prominence in equilibrium pricing in markets where search is sequential and random. Our model key feature is that more prominent firms are more likely to be sampled first. In contrast to ordered-search models, we find that more prominent firms inherit larger but less elastic demands, and as such have incentives to post larger prices. However, they might post lower prices but still charge higher markups than less prominent competitors only if they are also sufficiently more efficient. Our results suggest that when search is sequential, the role of prominence depends on whether it modifies the order or just the chances with which firms are sampled.

Large and small firms in a global market: David vs. Goliath

This paper studies the impact of trade liberalization when large and small firms coexist in the same market. I develop a model of imperfect competition where a few oligopolistic firms coexist with a monopolistically competitive fringe. The former have a direct impact on the industry average price level, which depends on the breadth of their product scope. Oligopolists produce higher output per worker, charge higher markups, but also sell at higher prices than monopolistic single-product firms. Under linear demand, trade liberalization triggers the exit of small firms and the entry of foreign large firms, leading to more product variety but also to a higher average price. For a broad class of demand functions, the entry of an oligopolist induced by trade liberalization has a negative impact on consumer surplus. Producer surplus rises, but the total effect on welfare is ambiguous.

Patterns of Convergence (Divergence) in the Euro Area: Profitability Versus Cost and Price Indicators

We analyse patterns of convergence (divergence) across euro-area countries in manufacturing since monetary union and find that not only costs, but also profitability have followed divergent paths. We further find that profitability developments only partially overlap with those of unit labour costs and producer prices, more extensively studied in the literature. Considering the largest countries, profitability in manufacturing in Germany and Spain has risen by comparison with non-tradables and with respect to France and Italy, where profit margins in manufacturing have declined and have lost ground with respect to the non-tradable sector. We show that these developments are correlated to the relative export performance of these countries. This correlation also holds in a two digit sector-level panel analysis, comprising all the euro-area countries that first entered the monetary union. This is consistent with the recent international trade literature, according to which successful exporting firms, which are more efficient or produce better products, also charge higher mark-ups. Turning to Italy, after a protracted decline both export shares and profit margins in manufacturing have improved in recent years, which is consistent with a recovery in external competitiveness.

FDI in the Banking Sector

When countries open their financial sectors, foreign-owned banks appear to bring superior efficiency to their host markets but also charge higher markups on borrowed funds than their domestically owned rivals, with unknown impacts on interest rates and welfare. Using heterogeneous, imperfectly competitive lenders, our model illustrates that FDI can cause markups (the net interest margins commonly used to proxy lending-to-deposit rate spreads) to increase at the same time efficiency gains and local competition keep the interest rates that banks charge borrowers from rising. Competition from arms-length foreign loans, however, both squeezes markups and lowers interest rates. Both scenarios yield large welfare gains compared with financial autarky, except in countries with inferior domestic technologies or restricted entry by domestic banks.