Higher Markups Research Articles

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

We document that profitability—profit margins—has diverged in Euro-area countries since the introduction of the euro. Changes in profitability only partially overlap with changes in unit labour costs and producer prices, which are the indicators more commonly used in the literature to assess the competitiveness of euro-area member countries. We provide suggestive evidence that changes in profitability are correlated with changes in relative export performance, whereas the correlations between export and price and export and unit labour costs are unclear. We check the robustness of this correlation on a panel of 10 countries that adopted the euro between 1999 and 2001, and two-digit manufacturing sectors covering the period from 1999 to 2015, and conclude that profitability in the tradable sector is a useful indicator to assess the competiveness of euro-area countries. This is consistent with the recent international trade literature, according to which firms that export more are also more efficient or produce better products, as well as charging higher mark-ups.

PCN25 - Evaluating Availability, Prices and Affordability: Case Study of Selected Oncology and Innovator Medicines in Malaysia

High-priced medicines such as patented innovators and oncology items are great burden to healthcare budgets and barriers to treatment access worldwide. This study investigates availability, medicine price and affordability of selected oncology and on-patent medicines (medicines that still have patent protection) in Malaysia’s public and private sectors. This cross sectional study adapted the validated methodology developed by the World Health Organization/Health Action International. Procurement and patient prices were collected from public and private facilities nationwide for a case study of four oncology and four on-patent medicines. Availability was reported as the percentage of medicine outlets with the medicine. For international comparison, median prices were compared against International Reference Price (IRP). Mark-up was calculated as the percentage of patient price to procurement price. Affordability was determined by the number of days’ wages required for selected treatment courses. The average availability of the selected basket of oncology and on-patent medicines were 53.9% and 51.0%, respectively. There were wide variations between public and private procurement prices of the medicines studied. Compared to international benchmarks, oncology drugs were procured at 0.2 to 3.2 times the IRP. Median retail mark-ups of originator and generic oncology medicines were 20.7% and 130.2%, respectively. High mark-ups of 41.4% were observed for on-patent medicines. Although generics were affordable, originators were unaffordable. To illustrate, low-income patients need to work for about three days to afford on-patent medicines and up to a year to afford one course of cancer treatment. Since there are no generic alternatives, patients that are not able to afford the needed treatment may not have other treatment alternatives. Sustainable financing for expensive medicines is needed to safeguard medicines access and prevent catastrophic outcomes. Policies to reward innovation should be balanced with affordability, as people from different socio-economic groups deserve the same treatment.

Optimal replenishment cycle for perishable items facing demand uncertainty in a two-echelon inventory system

We consider a two-echelon supply chain with an upstream manufacturer and a downstream retailer for a single perishable product. The manufacturer processes raw materials into finished products, which are purchased by the retailer in each replenishment cycle. The raw materials of the manufacturer are highly perishable (i.e. perishing within hours or days), and the finished goods at the retailer face demand uncertainty and obsolescence. We model the manufacturer–retailer relationship as a Stackelberg game where the retailer is the leader and decides the replenishment cycle that minimises its mismatch cost between supply and uncertain demand. The manufacturer is the follower and decides its processing rate to minimise its unit cost for finished goods. Our results show that the raw material and finished goods lifetimes, which are interrelated through the duration of the replenishment cycle, have a significant impact on supply chain costs. Although raw material spoilage cost by itself is low, we show that short raw material lifetimes have a significant impact on the costs of both parties. Additionally, we find that while high manufacturer markups increase retailer costs, they reduce the manufacturer's costs due to large production batches.

Offshoring, employment, and aggregate demand

The article uses a demand-constrained small-open-economy model in the tradition of Keynes and Kalecki to study the effects of offshoring on aggregate demand and domestic employment. Offshoring is represented as labor-saving import-using technical change. The results depend on the behavior of the markup on unit costs. If higher markups absorb the competitiveness gain, the scale effect of labor demand is negative, and offshoring unambiguously reduces domestic demand and employment. If the markup remains constant, the net effect of offshoring on domestic demand and employment is ambiguous; it depends crucially on the price elasticity of exports.

Missed Sales and the Pricing of Ancillary Goods*

Firms often sell a basic good as well as ancillary ones. Hold-up concerns have led to ancillary good regulations, such as transparency and price caps. The hold-up narrative, however, runs counter to evidence in many retail settings where ancillary good prices are set below cost (e.g., free shipping or limited card surcharging in countries where the “no-surcharge rule” was lifted). We argue that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good’s cost so as not to miss sales on the basic good. A supplier with market power on the ancillary good market then takes advantage of cost absorption and jacks up its wholesale price. Hold-ups occur only when consumers are initially uninformed or naive about the drip price and shopping costs are high. The price of the basic good then acts as a signal of the drip price, since a high markup on the basic good makes the firm more wary of missed sales. Regardless of whether consumers are informed, uninformed but rational, or naive, mandating price transparency and banning loss-making on the ancillary good leads to (i) an efficient consumption of the ancillary good, and (ii) a reduction of its wholesale price, generating strict welfare gains.

Global Market Power and its Macroeconomic Implications

We estimate the evolution of markups of publicly traded firms in 74 economies from 1980-2016. In advanced economies, markups have increased by an average of 39 percent since 1980. The increase is broad-based across industries and countries, and driven by the highest markup firms in each economic sector. For emerging markets and developing economies, there is less evidence of a rise in markups. We find a positive relation between firm markups and other indicators of market power, such as profits or industry concentration. Focusing on advanced economies, we investigate the relation between markups and investment, innovation, and the labor share at the firm level. We find evidence of a non-monotonic relation, with higher markups being correlated initially with increasing and then with decreasing investment and innovation rates. This non-monotonicity is more pronounced for firms that are closer to the technological frontier. More concentrated industries also feature a more negative relation between markups and investment and innovation. The association between markups and the labor share is generally negative.

Global Market Power and its Macroeconomic Implications

We estimate the evolution of markups of publicly traded firms in 74 economies from 1980-2016. In advanced economies, markups have increased by an average of 39 percent since 1980. The increase is broad-based across industries and countries, and driven by the highest markup firms in each economic sector. For emerging markets and developing economies, there is less evidence of a rise in markups. We find a positive relation between firm markups and other indicators of market power, such as profits or industry concentration. Focusing on advanced economies, we investigate the relation between markups and investment, innovation, and the labor share at the firm level. We find evidence of a non-monotonic relation, with higher markups being correlated initially with increasing and then with decreasing investment and innovation rates. This non-monotonicity is more pronounced for firms that are closer to the technological frontier. More concentrated industries also feature a more negative relation between markups and investment and innovation. The association between markups and the labor share is generally negative.

Multi-Category Competition and Supermarket Pricing

Consumers buy products from multiple categories in their regular shopping. Some prefer to buy from a single firm, which owns lots of retailers, generating cross-category demand interactions. To attract consumer, retailers set lower prices and sell tail brands in some categories (vertical differentiation), or alternatively they create unbranded products that they sell exclusively to earn a high markup (horizontal differentiation). To study supermarket pricing, I develop a multi-category multi-seller demand model and estimate it using the Nielsen Consumer Panel Dataset. I quantify cross-category pricing effects and find strong substitution between categories. Although horizontal differentiation is an importance source of profit, the profit mainly comes from vertical differentiation.

Drug Pricing Pattern in China: Dilemma and Countermeasure

Maybe it is the most important medical reform for current China to adopt the bid-and-procurement scheme to correct the distortion of pharmaceutical resources allocation. Nevertheless, overpriced drugs often happen. This article aims to identify potential factors leading to the overpriced. Based on the mechanism rules of the scheme, it is found that unethical doctors are crucial to high price markup in the pricing pattern of drugs. Under China's actual conditions, asymmetric ownership is identified to be another cause of the overpriced by developing an asymmetric bidding model. How are the impacts of these two factors to be alleviated? Upon examination, several reform measures cannot effectively avoid the occurrence of the overpriced. Yet, the issue is very urgent for China because it is facing with the problem of population aging. Therefore, alternative options - a regulation-penalty tool and an investment subsidy policy - are proposed to improve China's health care.

Global Market Power and its Macroeconomic Implications

We estimate the evolution of markups of publicly traded firms in 74 economies from 1980-2016. In advanced economies, markups have increased by an average of 39 percent since 1980. The increase is broad-based across industries and countries, and driven by the highest markup firms in each economic sector. For emerging markets and developing economies, there is less evidence of a rise in markups. We find a positive relation between firm markups and other indicators of market power, such as profits or industry concentration. Focusing on advanced economies, we investigate the relation between markups and investment, innovation, and the labor share at the firm level. We find evidence of a non-monotonic relation, with higher markups being correlated initially with increasing and then with decreasing investment and innovation rates. This non-monotonicity is more pronounced for firms that are closer to the technological frontier. More concentrated industries also feature a more negative relation between markups and investment and innovation. The association between markups and the labor share is generally negative.

Product Market Strategy and Capital Structure: Evidence from Resale Price Maintenance

This paper studies how a firm’s pricing strategy affects its financial leverage. Retailers vary in pricing strategy, ranging from low markup (i.e., “discount”), no frills retailers to high markup retailers that offer extensive service. The choice of strategy affects the firm’s risks and opportunities and therefore debt capacity. The high-end strategy, for example, exposes the firm to price wars and free-riding by discount rivals that could drive it into financial distress. The cross-section of firms shows a negative relationship between markup and leverage, but the direction of causality is unclear. To establish causality, I exploit changes in the legality of discount pricing strategies to identify their effect on leverage. In various U.S. states and years, manufacturers could use resale price maintenance (RPM) to set the minimum price a retailer can charge. I find that allowing RPM leads discount retailers to reduce leverage and other retailers to increase it. The results show that firms choose a financial structure closely tied to their product market strategy.

Markups and product differentiation in the German brewing sector

AbstractIn this paper, we provide a method to separate the product differentiation markup from other sources of market power, i.e., collusive behavior or lack of market transparency, based on the estimation of a single reduced form equation. We apply this method to a sample of about 200 breweries in Germany, because beer is a differentiated product and at the same time the sector has repeatedly been suspected to show collusive behavior. Our empirical results show that a significant part of the estimated markup is due to product differentiation. This is especially true for beers produced in Bavaria. However, there are other important sources of imperfect competition. Markups are higher for large firms and increase over time. In addition, we observe increasing returns to scale and average costs above marginal costs. Hence, in the German brewing sector a high markup does not necessarily translate into a high profit margin. [EconLit citations: L13; L66].

Markups and Concentration in South African Manufacturing Sectors: An Analysis with Administrative Data

AbstractThis paper uses newly available firm‐level tax data to evaluate the market structure in South African manufacturing sectors in the period 2010‐2012. To describe the market structure, we compute markups for South African manufacturing firms and concentration indexes for 4‐digit manufacturing sectors. We find both significant markups and significant concentration across most sectors. We compare computed markups and concentration with early estimates in South Africa and with other international benchmark countries. We then examine the market structure based on the concentration, firms size and entry and exit dynamics to rule out some potential explanations for relatively high markups. We find that the relationships are not monotonic and point to the importance of specific barriers to entry in explaining the relationship between these three characteristics.

Gathering for Open Science Hardware 2016

Without hardware, there is no science. Instruments, reagents, computers, and other equipment are essential for producing systematic knowledge. Yet, current supply chains limit access and impede creativity and customization through high mark-ups and proprietary designs, compounded by proprietary hardware licenses and patents. Open Science Hardware (OSH) addresses part of this problem by sharing designs, instructions for building, and protocols. Expanding the reach of OSH within academic research, NGO initiatives, citizen science, and education has potential to increase access to experimental tools and facilitate their customization and reuse. We organized with others the “Gathering for Open Science Hardware” (GOSH) in 2016 to address what we see as the primary barrier to OSH: early adopters are disparate and separated by geographical and disciplinary borders which limit interaction, exchange and community building. This inaugural gathering brought together 50 of the most active developers, users, and thinkers in the OSH movement, complemented by expertise from diverse backgrounds, to seed a global community. This article provides a review of the activities and debates we conducted at GOSH 2016.

The effects of major U.S. domestic airline code sharing and profit sharing rule

This paper presents a structural model of code sharing among major U.S. domestic airlines and estimates a profit‐sharing rule. The profit‐sharing rule between partner firms in code sharing is estimated at 0.92, which suggests that the operating carrier acquires around 92% of profits from a round‐trip, and the marketing carrier retains 8% as a commission fee. Meanwhile, the economies of code sharing reduces marginal cost, and firms are able to price at higher markups. This implies that demand increases and consumers have larger surplus if code sharing creates new products.

Market Definition Changes the Story: Competition and Price Dispersion in the Airline Industry Revisited

We analyze the effect of competition on price dispersion in the airline industry and show that the outcome hinges on redefining the extent of a market. Using panel data from 1993 to 2013, an increase in competition has a positive effect on price dispersion in one-way markets but a negative effect in round-trip markets. This is driven by a bigger (smaller) decrease in the 10th percentile of the price distribution in the one-way (round-trip) markets. We provide suggestive evidence that airlines compete more aggressively in the lower tail of the price distribution in one-way markets due to higher markups.

Imperfect Credit Markets and Crime

AbstractThis paper analyzes the link between individual crime choices and imperfect credit markets. The study shows that, by affecting the equilibrium lending rate, credit market characteristics such as the mark-up required by lenders or the severity of information asymmetries between lenders and loan applicants influence the extent of crime. For example, higher mark-ups incite more crime when less borrowing makes the criminal opportunity more tempting. Similarly, law enforcement policies may impact on the credit market equilibrium.

Offshoring, Employment, and Aggregate Demand

The article uses a demand-constrained small-open-economy model in the tradition of Keynes and Kalecki to study the effects of offshoring on aggregate demand and domestic employment. Offshoring is represented as labor-saving import-using technical change. The results depend on the behavior of the markup on unit costs. If firms absorb the competitiveness gain through higher markups, the scale effect of labor demand is negative, and offshoring unambiguously reduces domestic demand and employment. If the markup remains constant, the net effect of offshoring on domestic demand and employment is ambiguous; it depends crucially on the price elasticity of exports.

Trade Intermediaries and the Tariff Pass-through

This paper aims at improving our understanding of the price effects of trade policies following two perspectives. First, we wish to study how the role of intermediaries in international trade affects the transmission of tariff changes to domestic prices. Second, we explore how our results are influenced by the degree of competition in the distribution-service market. In a Cournot oligopoly-oligopsony model, we show how the pass-through of tariff cuts to domestic prices is limited by the market power of intermediaries producing distribution services. Our long-run equilibrium is characterized by a larger number of firms selling at a higher mark-up. Market access barriers in distribution services determine to what extent tariff cuts are transferred to domestic consumers and foreign producers, affecting the size of their welfare effects. The benefits of trade liberalization policies can be better achieved if they are complemented by competition enhancing measures in the intermediation sector.

Market makers’ optimal price-setting policy for exchange-traded certificates

Abstract This paper presents the first theoretical model of the profit maximizing price-setting policy for the issuers of exchange-traded retail certificates. Unlike previous theoretical microstructure models, the market considered is unique in that the market makers do not face significant inventory costs or risk from informed traders. The model derives the time structure of the optimal markups over a certificate’s fair theoretical value and its relationship with optimal spreads, unhedgeable risk faced by the issuer and investors’ buying and selling decisions. It shows that (i) the optimal markups decrease inter-temporally, (ii) issuers adjust the markups according to investors’ demand, (iii) unhedgeable risk results in higher markups and influences their time structure, (iv) the markups and the spread are negatively related. Using data from the German market for leverage certificates, we find strong empirical support for the model-derived hypotheses, except for (iv). We find spreads exhibit little variation and this suggests that markups and spreads are not substitute profit sources for issuers in this market.