Lower Markups Research Articles

The real exchange rate and industrial investment: new evidence for Brazil

Abstract This study empirically investigates the influence exerted by the real exchange rate (RER) on investments in 81 sectors of Brazil’s manufacturing industry, between 2007 and 2018. The work has a number of novel features. First, a more disaggregated database is employed than that commonly found in the existing literature. Second, the article’s empirical findings indicate the existence of two competing channels through which a competitive RER may influence sectoral investments, that is: (i) positively, by enhanced exports and (ii) negatively, via more expensive imported inputs. Third, our empirical results also indicate that the RER’s influence is more significant in sectors with a lower mark-up, which means that a competitive RER—caused by expanding revenues from exports, offsets a lack of internal funds to finance new investments. Fourth, we tested the existence of an import penetration channel. The results reveal that a competitive RER increases investments as consumers substitute imported goods with domestic ones.

Inflation, Price Dispersion, and Welfare: The Role of Consumer Search

In standard macroeconomic models, the costs of inflation are tightly linked to the price dispersion of identical goods. Therefore, understanding how price dispersion empirically relates to inflation is crucial for welfare analysis. In this paper, I study the relationship between steady-state inflation and price dispersion for a cross section of U.S. retail products using scanner data. By comparing prices of items with the same barcode, my measure of relative price dispersion controls for product heterogeneity, overcoming an important challenge in the literature. I document a new fact: price dispersion of identical goods increases steeply around zero inflation and becomes flatter as inflation increases, displaying an Upsilon-shaped pattern. Current sticky-price models are inconsistent with this finding. I develop a menu-cost model with idiosyncratic productivity shocks and sequential consumer search that reproduces the new fact and exhibits realistic price-setting behavior. In the model, inflation-induced price dispersion increases shoppers' incentives to search for low prices and thus competition among retailers. The positive welfare-maximizing inflation rate optimally trades off the efficiency gains from lower markups and the resources spent on search.

Firm Heterogeneity and International Trade Liberalisation: A Generalized Cournot Oligopoly Approach

Abstract The main goal of this article is to contribute to the theoretical analysis of international trade under imperfect competition using the Cournot oligopoly model with heterogeneous firms. In particular, our objective is to provide some insights into the role of cost asymmetry in studying the effects of trade liberalisation in the Cournot oligopoly framework. In order to introduce firm heterogeneity into the oligopoly model we use the generalised Cournot framework with asymmetric firms that differ in terms of their productivity, levels of output and market shares. We show that trade liberalisation leads to the elimination of less productive firms and results in lower equilibrium prices, higher sales per firm and lower markups in the industry.

Corporate market power and monetary policy transmission in Asia

This paper empirically examines the effect of corporate market power on monetary policy transmission in Asia. Using panel local projections based on a firm-level dataset for 11 advanced and emerging Asian economies, we find that after a monetary policy tightening, the real sales of firms with low market power significantly decline, while real sales of firms with high market power respond little. Moreover, we find that the average responses of firms’ real sales to monetary policy shocks are driven by firms with low markups. Our findings indicate that rising market power impairs the effective transmission of monetary policy. We discuss the implications in terms of balancing the need for industrial policies that promote innovation-led productivity against effective competition policy to compress heterogeneity in market power dynamics and enhance the monetary policy transmission mechanism.

Targeted advertising with R&D rivalry

We analyze the effect of targeted informative advertising on firms’ incentive to improve product quality and the welfare implications. We find that, compared with mass advertising, targeted advertising results in (i) a decreased incentive to invest in R&D unless the cost of advertising is sufficiently low, (ii) a lower mark-up, net of product quality, being charged to consumers, and (iii) a smaller (larger) proportion of uninformed consumers when the cost of advertising is low (high). The firms may earn higher or lower profits, but consumers are usually better off due both to the lower net mark-up and to improved product-consumer match. Under certain conditions though, the negative impact of more uninformed consumers dominates and leads to reduced consumer and total welfare.

Regulating coopetition in an EV charging market

This paper explores the coopetitive relationship between a private firm and a utility when the utility simultaneously competes with the firm in the output (EV charging-station) market and potentially cooperates in the input (electricity) market through its choice of a mark-up rate on the price of electricity supplied to the firm’s charging stations. In the absence of regulation, we find the utility chooses to self-regulate itself (i.e., cooperate with the firm) in the input market in order to continue earning revenue from the sale of electricity to the firm’s charging stations. We uncover the condition under which the utility chooses not to decrease its mark-up rate in response to an increase in market demand for EV charging. We similarly uncover the condition under which a regulator chooses a lower mark-up rate than the utility. Numerical analysis illustrates these findings. • Theoretical framework explores coopetition in an EV charging market between a private firm and utility. • In absence of regulation, utility self-regulates the wholesale mark-up rate it charges for electricity. • Conditions are derived under which a regulator chooses to lower utility’s mark-up rate. • Numerical analysis illustrates these findings for different types of market demand.

Labor price distortion and export product markups: Evidence from China labor market

In the context of expanding the new pattern of opening-up, how to improve export product markups is of great significance to China's high-quality export development. This paper systematically investigates the impact of labor price distortion on the markups of export products by using the combined data of Chinese industrial enterprise database and customs database from 2000 to 2013. The results show that labor price distortion significantly inhibits the increase of export product markups of China's manufacturing enterprises, and the above conclusion is still robust after using various methods for robustness test, but this effect is heterogeneous due to different factor intensity, export destination, trade mode, region and ownership. The mechanism tests demonstrate that labor price distortion inhibits the increase of markups through inhibiting R&D innovation, reducing factor allocation efficiency and causing low efficiency of enterprise scale, among which R&D innovation is the most important channel. In addition, this paper examines the impact of labor price distortion on the change of industry aggregated markups, and finds that intra-enterprise effect and entry effect are the main channels for labor price distortion to inhibit industry aggregated markups, while inter-enterprise effect and exit effect have little impact on industry aggregated markups. Our findings provide a new perspective for reinterpreting the mystery of low markups of Chinese export product, and provides an important decision-making basis for the improvement of China's export product markups.

Market power, markup volatility and the role of cooperatives in the food value chain: evidence from Italy

Abstract Agricultural cooperatives are often promoted as a way to give farmers countervailing market power and greater income stability. This paper investigates to what extent cooperatives in food supply chains achieve these objectives. We estimate firm-level markups and markup volatility in the Italian fruits and vegetable (F&V) and dairy sectors at both the farming and processing stages for the period 2007–2014. We find mixed results: compared to non-cooperatives, F&V processor cooperatives have higher markups, while F&V farmer cooperatives and dairy processor cooperatives have lower markups. We do not find strong evidence of their role on markup volatility.

Global Value Chain Participation, Competition, and Markups: Evidence from Ethiopian Manufacturing Firms

This study uses detailed manufacturing census panel data for 2000 to 2014 to explore the relationship between Ethiopian firms’ global value chain (GVC) participation and markups. We find that GVC firms, defined as firms involved in both exporting and importing intermediate inputs, tend to have lower markups relative to non-trading firms and firms that are involved only in material imports. Moreover, the more intensely a firm is integrated into a GVC (measured by the share of export value added and imported inputs in total sales), the lower its markup is. Finally, we explore competition effects at the industry level and find that firms operating in industries with a relatively high GVC presence and suppliers selling inputs to such industries tend to have lower markups owing to horizontal competition and backward linkages, respectively. All of these findings suggest that GVC participation is associated with greater competition for Ethiopian firms.

De-risking of green investments through a green bond market – Empirics and a dynamic model

A substantial increase of green investments is still required to reach the Paris Agreement’s emission targets. Yet, capital markets to expedite innovative green investments are generically constrained. Literature has shown that governments could de-risk such investments. Empirical beta pricing and yield estimates reveal some public involvement in the green bond market, especially for long maturity bonds. We provide empirical evidence that Governments and Multilateral organizations can de-risk green investments by supporting the issuance of green bonds in contrast to private green bonds - that show higher yields, volatility and beta prices - and conventional energy bonds, that are more volatile due to oil price variations. Since lower betas also mean lower capital costs, we use these empirical results and run a dynamic model with two types of firms, modeling the economic behavior of innovators (renewable energy firms) and incumbents (fossil fuel firms). Our model reveals that de-risked interest rates, from the cost side, and mark-ups and profit flows, from the market side, improve new entrants’ performance. As innovators normally have low mark-ups, inducing higher profit flows and lower capital costs allows a better default risk control and debt repayment which keep the firms in the market for a longer period of time and maintain low debt levels. Subsidies and carbon taxation can complement the role of the de-risked interest rate and expedite the energy transition.

Concentration, Retail Markups, and Countervailing Buyer Power: Evidence from Retail Lotteries

In this note, we investigate the causal link between market concentration and markups in a retail setting. We study the Washington retail cannabis industry, which features exogenous variation in market concentration that resulted from retail licenses being awarded via lotteries. We observe markups directly. We find a negative causal relationship between markups and concentration, where more concentrated markets have significantly lower markups and wholesale prices. The results provide direct evidence of countervailing buyer power by retailers. These results highlight the value of using industry specific data and rich models of competition to advance the debate on concentration and markups.

How Do Firms Build Market Share?

The question of how firms build market share matters for firm dynamics, business cycles, international trade, and industrial organization. Using Nielsen Retail Scanner data for the United States, we document that in the consumer food industry, brands experience substantial growth in market share in the first four years after successful entry into a regional market. However, markups are flat with respect to brand tenure. This finding is at odds with a large literature on customer markets which argues that firms acquire customers by temporarily offering low markups, and later raise markups once customers are locked in. However, it is consistent with a literature which em- phasizes the importance of marketing and advertising activities for building market share.

Multinationals and Domestic TFP: Market Shares, Agglomerations Gains and Foreign Ownership

We explore the role of Multinational Enterprises (MNEs) on Total Factor Productivity (TFP) of domestic firms by drawing attention to the foreign ownership structure. First, we differentiate between market share (MS) due to competition effects and knowledge agglomeration gains (AG). The former induces market pressure, due to foreign presence, and makes domestic firms charge lower price mark-ups. Second, we investigate whether intra-industry (horizontal) and inter-industry (vertical) spillovers vary with the degree of foreign control. Using a sample of manufacturing firms from six European countries, we find that a higher presence of MNEs in the domestic market makes domestic firms charge lower mark-ups. Only Majority and wholly-owned MNEs generate statistically significant horizontal spillovers. The economic size of these spillovers is low. We also detect backward spillovers from MNEs in downstream industries. However, forward spillovers from MNEs in upstream industries are negative. When we control for absorptive capacity, direct linkages with MNEs, scope of product differentiation and geographical proximity, the economic size of AG increases substantially.

Markups of Chinese exporters: Export discount and product choice

AbstractEconomists find that exporters usually have higher markups than non‐exporters. Our work, however, shows that Chinese exporters have lower markups than non‐exporters in China. The result is economically and statistically significant. We argue that Chinese exporters have lower markups because they tend to produce products that usually have low markups. The finding is consistent with the hypothesis that China has a comparative advantage in low‐markup products.

The dynamics of core and periphery in the European monetary union: A new approach

Despite numerous studies about core-periphery in monetary unions, few focus on their dynamics. This paper (i) presents new theory-based, continuous and dynamic measures of the probability of a country being classified as core or periphery; (ii) estimates the determinants of the changes in this probability over time and across countries; and (iii) uses the Phillips-Sul convergence panel framework to investigate the behaviour of core and periphery groups over time. Our main results indicate that the post-EMU decrease of the core-periphery gap that we document was mainly driven by the adoption of the euro and by increasing competition (lower mark-ups).

Do exporters have markup premiums and why (not)? Evidence from China

AbstractThis paper examines the relationship between exports and markups in Chinese manufacturing firms. In particular, the investigation focuses on how ownership differentiates the export–markup nexus and how heterogeneity in export contents affects exporters' markups. The export–markup premium is found exclusively in the full sample and domestic firms. In contrast, exporters of foreign‐invested enterprises (FIEs) demonstrate a lower markup than their non‐exporters counterparts, ceteris paribus. The possible channels and mechanisms that result in such results are proposed and discussed. Furthermore, export types and export variety can influence exporters' markups. Ordinary exports carry a higher premium than that of processing exports for domestic exporters; multi‐product exporters exhibit a higher markup than single‐product exporters. The markup effect of export destinations varies between domestic firms and FIEs.

Consumers’ choice of the services of Islamic banks in dual banking system

Purpose The purpose of this study is to examine how the Islamic banks fix their mark-up for Murabaha contract strategically when traditional banks also co-exist in a country. This study also aims to investigate what role the varying degree of Iman (faith) plays in shaping the preferences of the consumers to choose between the services of Islamic banks and the traditional banks. Design/methodology/approach This paper constructs a mathematical model like the Bertrand competition in neo-classical economic theory. A religiosity parameter for the consumers has been inserted into their demand functions for their products. A simple optimization technique from mathematics has been used to arrive at the results. Findings This paper applies game theory to analyze how Islamic banks determine their mark-up when they are facing competition with traditional banks. It considers the demand functions of the consumers for the products of Islamic banks and traditional banks. The demand functions depend on the mark-up, as well as on the interest rate with the difference that they also depend on the religiosity of the consumers. The paper shows that Islamic, as well as the conventional banks charge lower prices for their loans if there is consideration of religiosity aspect of the consumers. Further, it shows that as religiosity increases in a country, the lending rates decrease. The theoretical result is also consistent with the real practices of the banks. Therefore, the dual banking system is welfare enhancing for the customers. Research limitations/implications The Islamic banks can leverage the religiosity aspect of the consumers and expand their business competitively by charging them lower mark-up. The adherence of religious customers to the services of Islamic banks creates some kind of loyalty premium for them. This could lead to the reduction of mark-up price triggering competition between both types of banks to attract more customers. Therefore, it is prudent for the government to develop a system for furthering the quality of honesty that is an integral part of Islam. Originality/value To the best of author’s knowledge, this is the first paper where it has been analyzed theoretically how the Islamic banks determine their mark-up for Murabaha contract strategically. This approach explains why the rate of return of Islamic banks hinges on the interest rates of traditional banks. One of the novel feature of this paper is that religiosity character of the consumer is good for banks because religiosity prohibits the people to default on their loans.

Service firm performance and foreign ownership

Abstract Little is known about the performance of service firms and its relations with foreign direct investment (FDI), in part due to methodological and conceptual challenges in measuring service performance. This article suggests two possible measures of service firm performance: total factor productivity (TFP) and markups, with modification needed to improve those measures for the service sector. Using these measures, it examines service firm performance from 1997 to 2007 in Tunisia, where the service sector accounts for 60% of GDP but faces high protection and complex entry barriers. Then, it investigates whether variations in performance can be explained by FDI. It finds that FDI firms have higher TFP but lower markups than local firms, with significant variations across sub-service sectors.

International Trade and Corporate Market Power

This paper examines the effect of international trade on corporate market power in emerging market economies and developing countries, with a special focus on sub-Saharan Africa. The analysis is based on a large firm-level dataset, tariff data by sector and agreggate indicators of international trade for the period 2000-17. Greater trade liberalization and trade integration are associated with significant declines in market power, with the effect being more pronounced for firms in the manufacturing and ICT sectors, private sector firms, and firms with higher initial markups. Firms in sub-Saharan Africa tend to experience signficantly lower markups after allowing greater trade integration. The effects of trade liberalization on market power materializes over time, and there are significant complementarities between trade reforms and real sector reforms.

Foreign ownership and market power: The special case of European banks

Abstract The paper examines the nexus of foreign ownership and competition which is at the center of recent mandates for coordination between competition and regulation policies. We match estimates of market power with ownership data for 949 banks in 26 European countries over 1997-2013. We show that well-capitalised banks tend to enjoy high monopoly rents through cost-cutting strategies after entering emerging markets via M&As. Foreign presence has a U-shaped relationship with market power in the developed Europe, where Greenfield investments appear also as a mechanism through which country-level foreign presence leads to lower mark-ups. The results are robust to various specifications that address parameter heterogeneity and selection bias.