Low Markup Research Articles

Investigating the international corporate tax revenue efficiency under the digital economy: multiple case study of MNES operating in India

PurposeThe purpose of this paper is to validate the theoretical finding that digital MNEs avoid physical presence norms of permanent establishment and royalty characterization rules for business and royalty taxation, respectively, to escape tax incidence in the market economy, using information, communication and technology features and transfer pricing (TP) manipulations.Design/methodology/approachMultiple case studies of MNEs from technology sector, based on judicial decisions in 141 cases, over taxability of profits earned from Indian economic activities. Additional in-depth case study of the Uber Group to study the tax avoidance structures under platform economy, by routing of Indian profits through The Netherlands, a tax haven.FindingsThe study finds a significant number of digital MNEs earning profits from India and avoiding tax by defying physical presence and royalty characterization. In majority of the cases, demand-side business activities are discharged through incorporating and remunerating affiliates at cost plus low markup, thus avoiding tax incidence, using TP manipulations under the arm’s length principle applied by governments for benchmarking the intragroup transactions of the MNEs.Research limitations/implicationsThe research findings validate the view that digital features promote tax avoidance in the market economy.Originality/valueThe originality of the study lies in the validation of profit shifting through digital features from the developing market economy and portending that digital MNEs defy physical presence to avoid business taxation through TP manipulations.

Export duration and firm markups: evidence from China

Against the backdrop of China’s upgrading of its openness to the outside world, analyzing the impact of export markets on a firm’s markup—an important indicator of a firm’s pricing power and market power—is of great significance for improving the firm’s international competitiveness and the benefits of the global value chain. This study theoretically and empirically examines the effect of export duration on firm markups using micro data from Chinese manufacturing enterprises. According to a theoretical study, an increase in export duration will result in an increase in firm markups via the “production efficiency” channel but a decrease in firm markups via the “market-based pricing” channel. Therefore, the impact of an increase in export duration on the markups of firms is uncertain. Results of the empirical analysis reveal that the positive impact of an increase in export duration on the markups of Chinese manufacturing firms via the “production efficiency” channel is higher than the negative impact of an increase in export duration via the “market-based pricing” channel. Overall, the increase in export duration has a positive impact on Chinese manufacturing companies’ markups. This conclusion is valid after a series of robustness tests. Further analysis reveals that the impact of export duration on the markups of different types of Chinese manufacturing firms differs, and significant heterogeneity exists. This research can help us better understand how Chinese export firms fall into the “low markup trap” and offer fresh insight into how export markets affect company markups.

Internetization and the markups of export firms: Evidence from China

Can internetization help Chinese exporting firms escape the “low markup trap”? We contend that it does, as internetization improves firms' capabilities and efficiencies in gathering and communicating information. We incorporate information costs and firm innovation choice into a heterogeneous firm model to test this hypothesis. The causality between firm-level internetization and markups is identified with a new instrumental variable designed to capture exogenous shocks to firm-level Internet exposure. After analyzing various internetization strategies, including social media, emails, and homepages, our results indicate that internetization directly increases the markups of Chinese exporting firms. In addition, with the enhanced information availability, internetization stimulates their innovation activities. Thus, we identify innovation as one channel, among others, through which internetization indirectly boosts the markups of China's export firms.

259. Hospital mark-up and outcomes following lumbar fusions: moving towards the era of transparency in prices

BACKGROUND CONTEXT Even though charges levied by hospitals for provision of surgical services has broad financial implications on insurance contracts, pricing is not subject to regulation. As a result, hospital mark-ups (1/charge-to-cost ratio (CCR)) are known to vary significantly across the nation. While hospital administrators argue that higher hospital mark ups are reflective of high-quality care, no study have evaluated the impact of undergoing surgery in high markup hospitals on 90-day outcomes following lumbar fusions. PURPOSE To evaluate whether hospitals with higher mark-up ratios for lumbar fusions is associated with improved/better outcomes. STUDY DESIGN/SETTING Retrospective review of 100% Medicare Standard Analytical Files (SAF100) database. PATIENT SAMPLE The 2014 100% Medicare Standard Analytical Files (SAF100) was queried using DRG code 469 (SPINAL FUSION EXCEPT CERVICAL W/O MCC) to identify patients undergoing lumbar fusions. Hospital mark-up of facilities was calculated using a previously validated formula: (1/CCR). Hospital were divided into three groups – 1) low mark-up (0-2.99), 2) medium mark-up (3.00-5.49) and 3) high mark-up (>5.49). OUTCOME MEASURES Ninety-day complications and readmissions. METHODS Multivariate logistic regression analyses were used to assess for differences in 90-day outcomes between high, medium and low markup hospitals, while controlling for age, gender, region, Elixhauser Comorbidity Index, diagnosis (fracture or degenerative lumbar pathology), approach (anterior or posterior), type of fusion (primary vs revision), extent of fusion (1-3 level or 4-8 level), use of interbody, BMP, neuromonitoring, concurrent laminectomy or discectomy, hospital bed size, teaching status, hospital location (urban or rural), ownership (government, proprietary or voluntary), and whether hospital was a high volume facility (≥ 70 cases/year). A p-value of less than 0.025 was considered significant, due to comparison being carried out between three groups. RESULTS A total of 75,707 patients undergoing surgery in 1,365 hospitals were included – out of which 17,466 (23.1%) received surgery in high mark-up hospitals (N=341), 36,888 (48.7%) received surgery in medium mark-up hospital (N=805) and 21,353 (28.2%) received surgery in low mark-up hospitals (N=341). Following adjustment for baseline demographics, hospital-level factors and clinical characteristics, undergoing surgery at high mark-up hospital (vs low mark-up hospital) was not associated with significant differences in wound complications (p=0.935), sepsis (p=0.139), revision fusion (p=0.139), acute renal failure (p=0.098), myocardial infarction (p=0.774), deep venous thrombosis (p=0.046), pulmonary embolism (p=0.442), and urinary tract infections (p=0.739). High mark-up hospitals, vs low mark-up hospitals, had slightly lower odds of pneumonia (OR 0.76 [95% CI 0.64-0.92]; p=0.004) and readmissions (0.91 [95% CI 0.84-0.98]; p=0.012). Similarly, no significant differences in outcomes were noted between medium mark-up hospitals (vs low mark-up hospitals), with the exception of slightly lower odds of urinary tract infections (p=0.009). CONCLUSIONS Based on the findings of the study, it appears that hospital markup is not largely correlated with the quality of surgical care following lumbar fusions. Moving forward, price transparency in billings will be essential for controlling the ever-increasing cost burden associated with spinal fusions. FDA DEVICE/DRUG STATUS This abstract does not discuss or include any applicable devices or drugs.

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.

Endogenous Protection within a framework of monopolistic competition à la Dixit–Stiglitz

The author studies the determination of trade policy by considering an imperfectly competitive market. The model adopts the political process developed by Grossman and Helpman (1994), but it also takes into account a different economic structure, which is based on the Footloose Capital model. Two new appealing insights come from the consideration of monopolistic competition. Firstly, in this setting, the interest group seems to be more worried to persuade the government to set a high tariff when it can charge a low mark-up. Secondly, the initial distribution of industry might also influence the structure of protection in one economy.

Exchange Rate Movements and Exporter Profitability: Empirical Evidence from Chinese Manufacturing Sectors

Most products exported by Chinese manufacturing firms are characterized by high labor-intensity and low markup. Renminbi (RMB) appreciation undoubtedly worsens this situation as exporters have to pay RMB-denominated wages and charge dollar-denominated prices. This paper studies the correlation between exchange rate movements and the profitability of exporters. We find significant negative effects of RMB appreciation on the profitability of exporters.

Analysing interest rate mark-ups in the Australian mortgage market

The aim of this paper is to enhance transparency and competition in Australia's mortgage market by examining the behaviour of the mortgage interest rate spread of 39 individual lenders. Using a time-varying probability regime-switching model and monthly data (2000M9–2012M3), we identify two very distinctive regimes: a low mark-up regime (R1) and a high mark-up regime (R2). Without setting any given date a priori, the results from both the regime-switching approach and a sequential search method indicate that the spread exhibits a significant upward shift around early 2008 for all lenders. The estimated switching model controls for the rising wholesale funding costs and changes in global consumer confidence over the sample period. The results show that building societies are generally less inclined to remain in R2 than most banks (particularly foreign subsidiary banks) and some credit unions, and are consequently more likely to offer competitive mortgages to borrowers.

Remodeling Trade Elasticities: Price and Quality in the Global Economy

This paper develops a new theory of international specialization that tractably combines all aspects of North-North and North-South trade into one model. The new theory also provides an alternative explanation for many other well-established facts, most notably the “Washington apples” effect. The theory builds upon, and retains the central elements of Krugman [1980]. In the new framework, North-North trade is governed by national product differentiation. North-South trade is governed by a new channel of across product specialization that has been overlooked in the literature. Specifically, there are many products and each product comes in different varieties. Products differ in how (horizontally) differentiated they are. Monopolistically competitive firms charge a higher markup for varieties of highly differentiated products. In equilibrium, rich countries specialize in highly differentiated–high markup products, while poor countries specialize in less differentiated–low markup products. To quantify the gains from trade, I estimate the structural parameters of the model using disaggregated data. Incorporating the new channel of acrossproduct specialization into the Krugman model magnifies the gains from opening to trade by around 200%. Despite trading less, low-income countries experience the largest gains from trade liberalization. JEL-Classification: F12, F14, O15, L25

Phenotypic analysis of breast cell lines – triple negative cells vs expressing hormonal receptors

Breast cancer patients are stratified in 3 groups: expressing hormonal receptors (HR), which respond to therapies targeting estrogen receptors; HER2+, candidates to trastuzumab; and triple negative (TN), for which, despite its more aggressive clinical behavior, chemotherapy is therapy available. In vitro studies proved that cells subjected to specific growth factors form spherical colonies of stem-cells in suspension designated mammospheres (MS). The aim of this work is to assess the capacity to form MS in TN (HCC1806) comparing with HR+ (MCF7) breast cancer cell lines. Cell lines were propagated according to ATCC. MS forming protocol consisted on cell culturing in DMEMF12 supplemented with bFGF and EGF. Media was renewed every 2 days. Flow cytometry analysis, with antibodies anti-CD44, anti-CD24 and anti CD133 was made. Microscopic observation showed a differential phenotype. HR+ cells formed spherical colonies in suspension while TN maintained adherent appearing only a few groups of MS. This may be related with late recurrence. Controls of both cell lines analyzed showed a low CD44 markup. For both cell lines CD133 did not show significant changes. HR+ cells had higher expression of CD44 and CD133 when compared with TN. In TN cells was identified 2 populations of cells in suspension. The major one was CD44+ and in 1% this expression was even more relevant and may be representative of a progenitor cell population. The HR+ showed stronger staining for CD24 than TN. The HR+ also differentiated 2 populations, a major one CD44+ and 9% with minor expression of CD44. The results suggest a significant fraction of HR+ harboring CD44+, representing a phenotype of progenitor cells.

The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry

This paper, considering revenue and cost exposure channels, investigates the effects of exchange rate on fixed capital investment in Mexican manufacturing sector over 1994–2003. We find that i) currency depreciation has a positive (negative) effect on fixed investment through the export (import) channel; ii) exchange rate volatility impacts mostly export oriented sectors; iii) the sensitivity of investment to exchange rate movements is stronger in non-durable goods sectors and industries with low mark-up ratios.

What Determines Banks' Market Power? Akerlof or Herfindahl

We introduce a theoretical model predicting that banks' interest rate markups follow a lifecycle pattern. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup until it falls for old firms. By applying a large sample of small firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. We also examine effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems (Akerlof). However,we find weak evidence that bank market concentration is important for old firms (Herfindahl).

Mandated countertrade as a strategic commitment

Mandated countertrade is a policy to restrict unilateral imports. A country's government thereby in effect commits domestic firms not to purchase from a foreign trading partner unless there are reciprocal sales. We argue that the policy may be a rational response to fundamental contracting failures, our key assumption being that sellers are incompletely informed about buyers' valuations. In line with observed practices, the analysis suggests that an optimal mandated countertrade policy will target high mark-up imports and low mark-up exports. Implications for global welfare are ambiguous and depend upon the extent of a double coincidence of wants.