Markup Level Research Articles

The Current and Expected Pricing Markup as Derived from the Capital Asset Pricing Model and Tobin’s Q and Applied to the UK’s FTSE 100

Price markups and firms’ Tobin’s Q ratios are widely believed to have been increasing in the past several decades. Various models for the calculation of price markups have been developed, each relying on the historically held definition of the ratio of price to marginal cost; however, all of these have methodological drawbacks, and some of the results they have produced have been poorly reflective of the near past wider macroeconomic experience. This paper defines a new approach for the definition and measurement of markup pricing, and it also avoids some of the issues surrounding the marginal cost approaches by using the measure of economic rent and the capital asset pricing model. The results show limited markup pricing for the UK’s FTSE 100 companies (2018–2023), but that certain real estate, technology/media and financial services/equity investment firms have enjoyed higher price markup levels. An analysis of the business models of these firms is used to qualitatively propose explanations for such markups. This work offers formal proof that that the expected price markup is equal to Tobin’s Q and finds that the empiric market level of markup is near equivalent to the market Tobin’s Q; the differences between the markup and Tobin’s Q at the level of the firm are equally assessed. This work challenges the general consensus that price markups are above one and have been increasing; it may also aid policy makers with respect to taxation policy and regulatory measures, as well as the financial management of firms in decisions concerning capital deployment and portfolio management. The method merits expansion to wider data sets, as well as to those from outside of the UK.

Professional judgement: an institutional logic approach to contractor tender pricing

Competitive tendering is the default procurement route for most types of construction projects in the UK. As a process, it is costly, time-consuming and complicated, involving input from upwards of 200 separate organisations per project. Existing research has mainly focused on identifying discrete factors that influence contractor pricing. While many scholars and professionals treat the level of mark-up as a technical problem, others acknowledge the role of professional judgement. This paper uses the neo-institutional concept of ‘hybrid institutional logics’ and an exploratory study into two projects in one firm to explore the way in which different types of professionals work together to produce a single price. The research documents the existence of two distinct logics: a first-principles cost estimation logic and strategic mark-up logic. These are combined in a highly structured process, with moments of separation, bridging and demarcation. These findings explain how firms purposefully balance multiple cognitive schemas to manage resources and position themselves in the market. The research also offers a novel theoretical approach to the study of multidisciplinary collaboration which can be used to address issues of integration more generally. <em><strong>Practice relevance</strong></em> A study of the ways in which main contractors balance multiple considerations when tendering offers several contributions to practice. First, it identifies how pricing is influenced by socially embedded professional judgements. These include judgements about: (1) the current market price (independent of supplier bids); (2) the firm’s market position and relationship with clients, suppliers and competitors; and (3) firm-level resource management. Second, it identifies several specialised competencies that inform the use of ‘intuition’ in pre-tender pricing and which contribute to ‘realistic’ mark-ups, notably ‘first-principles estimation’ and ‘strategic firm-level mark-up’. Third, it analyses the way in which these are mobilised across the tender preparation process, drawing attention to ways that distinct competencies are combined in bid preparation, in particular, and in everyday work processes, more generally.

Competition, Technological Change and Productivity Gains: A Sectoral Analysis

The empirical relationship between competition intensity and the rate of productivity growth across 30 sectors of the French economy between 1978 and 2015 displays an inverted U-shape. This implies that there exists an optimal level of competition for each sector, defined by the price markup that maximises the growth rate of hourly labour productivity. As there is a significant and strong positive correlation between optimal markups and technical progress rates in each sector, it follows that sectors with high technical progress require higher markups to maximise their labour productivity growth rate. The persistence of non-optimal markups in French sectors is associated with a 0.4% loss in aggregate annual labour productivity growth during the period (1.86%). French long-term productivity growth could have reached 2.25% had markups been at their optimal level. As a result, policies to foster innovation and productivity should aim at enabling the optimal level of markup (or market power), particularly in high-innovation sectors.

Markups in a two-country monopolistic competition model of trade with heterogeneous consumers

The paper develops a two-country monopolistic competition model of trade featuring country-specific consumer tastes. The accounting for heterogeneity in tastes is achieved by assuming different elasticities of substitution in the CES utility function for different country consumers. The proposed framework extends the canonical Krugman’s approach by revealing new effects regarding markups response to consumer heterogeneity and trade liberalization. Specifically, the model predicts that, depending on the preference structure, trade liberalization may lead either to decrease or increase in the level of markups, charged by monopolistically competitive firms across destination countries.

Measuring the effects of structural reforms in Malta

Abstract. Structural reforms are crucial to boost an economy’s long-term growth potential, enhance its resilienceand increase its flexibility to adjust to adverse shocks. Malta has implemented a number of reforms in recent years, both to its labour and product market, which could in part explain its stellar growth performance after the crisis. Furthermore, EU membership has facilitated the inflow of foreign labour that helped to address critical labour and skill shortages. This paper quantifies the macroeconomic effects of structural reforms in labour and product markets using EAGLE, a large scale multi-country DSGE model, calibrated for the Maltese economy, as a small and open economy in a monetary union. The results show that a 10 percentage point reduction in product and labour mark-ups raises GDP by more than 5% in the long-run. The implementation of the reforms in isolation is associated with adjustment costs but the joint implementation of reforms can, to a large extent, soften the transition costs associated with the reforms. The results are robust to varying levels of mark-ups and different parameterization of the model. A key driver behind this finding is the adjustment in the labour market. This calls for policies to further reduce skill mismatches and for incentives that attract and retain more people in the labour market. Keywords. Structural reforms, Competition, DSGE models, Malta. JEL. C53, E27, F41, F47.

Market Power and Monetary Policy

In this paper we explore the link between monetary policy and market power. We start by establishing several facts on market power in UK markets using micro data. First, while no clear trend emerges for market concentration, market power measured by markups estimated at the firm level have clearly increased in recent years, with the rise being reasonably broad-based across sectors. Second, we show that the increase is heavily concentrated in the upper tail of the distribution — companies whose mark-ups are in, say, the top quartile. Third, internationally-oriented firms are the driving force behind the rise in markups. Fourth, following Diez et al (2018), we find some reduced-form evidence of a non-monotonic relation between markups and investment at the firm level, with high levels of markups being associated with lower investment. Having established these facts, we show that the Phillips curve becomes steeper in the textbook New Keynesian model when firms tend to have more market power, reducing the sacrifice ratio for monetary policy. As inflation becomes less costly in an economy with high market power, however, the optimal targeting rule for monetary policy also changes. A rise in both the trend and volatility of mark-ups may lead to a significant rise in inflation variability. But a secular rise in mark-ups by itself improves monetary policy’s ability to stabilise inflation without inducing large movements in output.

Pengaruh Partisipasi Anggaran, Informasi Asimetris Dan Budget Emphasis Terhadap Slack Anggaran

Budget slack is a behavior of individuals and organizations in preparing budgets even more so if the budget is used as a basis for performance measurement. The occurrence of a budget slack, namely budgetary slack will make the performance look better in the eyes of superiors if they can achieve the budget goals. Budgetary slacks are often used to overcome uncertainties predicting the future and the allocation of resources will be carried out based on the projected budget costs, so that slack makes flexible. Budgetary participation, asymmetric information, and budget emphasis are factors that influence the occurrence of budget slack. The study was conducted at the Badan Perencanaan dan Pembangunan Daerah (BAPPEDA) of West Sumatra with a total of 50 respondents consisting of heads of departments, heads of fields, sub-sections, and other employees related to the budget. Data sources in this study are questionnaires that use multiple regression analysis. The results of the research that have been conducted show that asymmetric information affects the occurrence of budget slack. Information owned by subordinates or superiors is the basis for setting the markup level on the budget.

Learning-by-doing, organizational capital and optimal markup variations

We characterize optimal markup variations in an otherwise standard Ramsey model augmented with learning-by-doing mechanism to firms’ technology. In our setup, firms learn from their production experience and accumulate an intangible organizational capital stock which raises their future productivity. Two main results emerge from our study. First, optimal Ramsey allocation features procyclical markup variations. Second, the level of markup is inversely related to the degree of learning. Both of these results stem from a common source - the dynamic link between the current level of production and the future levels of productivity. A change in markup not only changes demand and the level of production in the current period, it also affects the stock of organizational capital and productivity in the future. So, by changing markups procyclically, the Ramsey planner can essentially dampen the cyclical effects of a persistent productivity shock. With a higher learning rate the future productivity gain from a marginal fall in markup is larger and hence our model predicts that optimal markup should be lower for a higher rate of learning.

Bidding Model Incorporating Bid Position for Determining Overhead-cum-markup Rate

The direct cost of a construction project constitutes the majority of a contractor's bid, with the remaining part being its overhead cost and markup. Contractors often apply a combined rate of overhead and markup on top of the direct cost for producing a bid. Extending previous researches on overhead rate estimation and bid markup determination, this research aims to develop an improved bidding model incorporating the bid position for determining the minimum overhead-cum-markup rate so as to prevent an inadequate bid. Since factors influencing the overhead rate level may also influence the markup level, it is suggested to build a regression equation from actual bid data for estimating the overhead-cum-markup rate in the winning bid that is used to estimate the probability of winning for a bid. With assessments of probabilities of winning and those of making a loss for various bid levels, fuzzy inference systems that incorporate the bidder's positions in the fuzzy rules regarding the need for work and attitude toward risk are proposed. The model is illustrated using an example involving 406 projects. The suggested bids from the model for two cases of bidding are compared with those from other methods and the actual bids to examine its soundness. The results show that the model can differentiate the bid positions under varying scenarios and suggest minimum bids consistently.

The Distribution of Monopolistic Markups in the Polish Economy

Estimates of monopolistic markups are relatively scarce in the literature mostly due to lack of appropriate data and methodological difficulties, while their behaviour has important implications for the conduct of monetary policy. We estimate the monopolistic markups in the Polish economy in the period of 1995-2009 using Polish firm level data. We show the association of the markup level with the sectoral characteristics, type of good produced and the form of ownership, as well as investigate the impact of both internationalization and competitive pressure on the level of markups. We show a somewhat puzzling and at the same time robust increase in markups after the EU accession of the Polish economy to the EU in 2004. Moreover, in line with previous findings, we show that price cost margins are countercyclical with respect to the macroeconomic cycle and procyclical at sectoral level.

The Distribution of Monopolistic Markups in the Polish Economy

:Estimates of monopolistic markups are relatively scarce in the literature mostly due to lack of appropriate data and methodological difficulties, while their behavior has important implications for the conduct of monetary policy. We estimate the monopolistic markups in the Polish economy in the period 1995–2009 using firm-level data. We show that price cost margins are countercyclical with respect to the macroeconomic cycle and procyclical at the sectoral level and we associate these two effects with demand and supply driven shocks. We investigate the association of the markup level with the sectoral characteristics, type of good produced and the form of ownership, as well as show the impact of both internationalization and competitive pressure on the level of markups. The results of our study show a robust increase in markups after the accession of the Polish economy to the European Union in 2004.

Impact of Structural Components of Market on the Markup Level Based on Radial Basis Neural Network and Fuzzy Logic

This paper aims to evaluate the impact of several indices of market structure including entry to barrier, economies of scale and concentration degree on 140 active industries using the digit. Accordingly, we apply three methods including cost disadvantages ratio ( CDR ), Herfindahl– Hirschman concentration index ( HHI ) and Comanor and Willson criterion in order to assess the economies of scale and using the Roger's approach for measuring the Mark up level (µ ) in the industries. Hence, in this study first we cluster 140 industries according to the neural network under a radial basis function (RBF) and then identify the mark up level by extracting the rules indicating the relationships of structural variables of the market (i.e. concentration, entry to barrier and economies of scale).

The effect of construction demand on contract auctions: an experiment

Purpose– The purpose of this paper is to present an experiment to test the effect of construction demand on the mark-up price level in construction contract auctions.Design/methodology/approach– An experimental approach was adopted for this study. In a controlled laboratory environment, a first-price sealed bid auction was simulated with varying number of projects available over ten rounds to simulate changing construction demand. Two experimental treatments were run in parallel, one exhibiting a “booming” demand over time, and the other group with a “recession” scenario. The experiment involved student (inexperienced) bidders with a construction project management background.Findings– The results show that inexperienced bidders do behave differently when subjected to varying levels of construction demand. Variations in the bid price level are affected by varying levels of construction demand and the general mark-up level for the bidders experiencing a booming scenario was higher on average compared to bidders subjected to the recession scenario.Research limitations/implications– An identified limitation of this study is the use of student subjects in the experiment, thus the experiment results are limited in generalisation to inexperienced bidders. Further studies may be able to replicate the experiment with experienced industry practitioners to observe the results.Practical implications– The results allow for industry practitioners to gain a stronger understanding of the effects of varying levels of construction demand and the need to consider construction demand in construction contracting. For construction clients, the level of construction demand may be used as an indicator to assist in the timing to call tenders to achieve a desirable price. For contractors, increased awareness of how demand affects competition and the price level will allow additional optimisations to be achieved in the bid price.Originality/value– Construction demand has been widely known to be one of the key factors affecting contractors’ bidding decisions. However, there has been little empirical investigation of the changes in bidders’ behaviour due to varying levels of construction demand. This paper attempts to add to the empirical research knowledgebase through an experimental setting.

A Note to Investigate the Welfare: When the Upstream Firm Enters the Downstream Market

To investigate the changes of welfare and the degree of exploitation in consumer side when the upstream firm enters the downstream market, we construct a quantity competition model to analyze the changes in consumers’ welfare and the profits of upstream and downstream firms. The main findings of this note are as follows: The markup has a negative effect in consumer’s surplus and the degree of exploitation will deteriorate when the upstream firm goes into the other market. In addition, the profits in the firm which expands his production scale to downstream will decline when the markup level rises, but with no obvious effect in original downstream firm.

Cross-border integration in the European electricity market. Evidence from the pricing behavior of Norwegian and Swiss exporters

This paper examines the electricity market integration process in two European areas based on the pricing behavior of Norwegian and Swiss exporters. The aim is to gain evidence for the period after the adoption of the “Second Legislative Package” (2003). The pricing behavior of Norwegian exporters indicates that the wholesale markets for Denmark and Sweden are highly integrated. Moreover, results are fully compatible with the existence of a very competitive marketplace for electricity. This clearly contrasts with the evidence provided by Swiss exporters. In this last case, analysis revealed differences in pricing-to-market behavior between Italy, France and Germany, which indicates that exporters take advantage of international market segmentation and divergences between market structures. This outcome provides a reasonable explanation as to why price differences between countries cannot be fully attributed to transmission costs, as has been claimed in previous research. We also found cross-country convergence in levels of markups and in pricing-to-market behavior of the Swiss exporters for the first part of the period that was analyzed. The evidence is fully consistent with an initial impulse toward market integration originated by reforms implemented at the beginning of the last decade.

Gates’ Bidding Model

In evaluating closed-bid competitive procurement auctions, the most crucial issue is to determine the probability of placing a winning bid for a given markup level. There has long been disagreement on how this should be done due to the absence of a mathematical derivation of one of the main evaluation techniques—Gates’ method. Gates’ method is shown in this paper to be valid if, and only if, bids can be described using the proportional hazards family of statistical distributions. When markup values are included in Gates’ method, it is seen that the underlying statistical distribution required for the method to work is closely related to the Weibull distribution. Likelihood based methods are suggested for parameter estimation and an illustrative example is provided by analysis of Shaffer and Micheau's 1971 construction contract bidding data.

Using fuzzy risk assessment to rate cost overrun risk in international construction projects

Determination of an appropriate mark-up while bidding for international construction projects is a critical decision. Level of mark-up is a function of risks associated with a project. Construction companies may benefit from a tool that helps them to assess the level of risk so that they can determine an appropriate mark-up. The aim of this paper is to propose a fuzzy risk assessment methodology for international construction projects and develop a tool to implement the proposed methodology. The proposed methodology uses the influence diagramming method for construction of a risk model and a fuzzy risk assessment approach for estimating a cost overrun risk rating. A computerized system has been developed for an international construction company and applicability of this system during risk assessment at the bidding stage has been tested by using real company and project information. Although the developed tool is company-specific, similar tools may be developed for other companies using the same methodology and expert judgments that reflect different company objectives and risk policies.

Rise in German Wholesale Electricity Prices: Fundamental Factors, Exercise of Market Power, or Both?

It is the objective of this paper to quantify the significance of fundamental factors (like rising fuel costs) and of the increasing exercise of market power on rising prices in the German wholesale electricity market. A successive MIP/LP approach was used for this. The calculations show that, if the whole period from 2000 to 2005 is considered, fundamental factors explain most of the price movement. The increasing exercise of market power is less important for rising wholesale market electricity prices. Further analysis clarifies that the price-cost margin widened substantially already in 2003. In this year, the price-cost-margin was most extensive with almost 30%. The increasing exercise of market power was the single cause for the rising price in 2003. The price-cost-margin eroded in the following two years to 14 and 16% respectively. That means that only fundamental factors were responsible for the sharp price rise in 2005. Over the whole year, the price-cost-margin in 2005 was more or less the same as in 2004. But in contrast to 2004, the monthly values were very unstable. There are months when the price-cost-margin is more or less zero or even negative and there are months when the price-cost-margin is very large. As discussed in detail, one possible reason for this surprising result might be that the German power producers were in a strategic dilemma in 2005 because of the discussion that 2005 would probably be the new base year for the CO2 allowance allocation of trading period 2. The quite stable level of mark-ups for 18 hours in 2004 and, at least if fly-ups are not considered, the quite stable level of mark-ups in 2003 for 18 hours and in 2005 for 14 hours is surprising and conflicts with the typical expectation that mark-ups are larger if the demand is higher and the market tighter. As clarified, one possible explanation might be that for political reasons suppliers do not exercise all market power they possess but decide to have more or less stable margins on their bids during the hours when they possess market power.

Does Product Market Competition Reduce Inflation? Evidence from EU Countries and Sectors

In this paper we explore the link between the of product market and inflation rates across EU countries and sectors. We consider long-term averages of inflation rates in order to remove the cyclical behavior of inflation over time and as alternative proxies of we use the level of mark-up, profit margin, the profit rate and a survey based intensity of competition variable. Results for both aggregate and sectoral panels show that the extent of product market competition, as proxied by the level of mark-up in particular, is an important driver of inflation. Notwithstanding some caveats associated with the measurement of the proxies of used, our findings suggest that higher product market reduces average inflation rates for a prolonged period of time. Moreover, results both at the aggregate and sectoral level are generally confirmed by a wide set of robustness tests.

Biases in Static Oligopoly Models?: Evidence from the California Electricity Market

Estimating market power is often complicated by the lack of reliable measures of marginal cost. Instead, policy-makers often rely on other summary statistics of the market, thought to be correlated with price cost margins - such as concentration ratios or the HHI. In many industries, these summary statistics may be only weakly correlated with deviations from perfectly competitive pricing. Beginning with Gollop and Roberts (1979), a number of empirical studies have allowed the data to identify industry competition and marginal cost levels by estimating the firms' first order condition within a conjectural variations framework. Despite the prevalence of such New Empirical Industrial Organization (NEIO) studies, Corts (1999) illustrates the estimated mark-up levels may be biased, since the estimated conjectural variations model forces the supply relationship to be a ray through the marginal cost intercept, whereas this need not be true in dynamic games. In this paper, we use direct measures of marginal cost for the California electricity market to measure the extent to which estimated mark-ups and marginal costs are biased. Our results suggest that the NEIO technique poorly estimates the level of mark-ups and the sensitivity of marginal cost to cost shifters.