Price Markup Research Articles

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.

Market Structure, Oligopsony Power, and Productivity

I study how ownership consolidation affects productivity and market power in both factor and product markets. I develop a model to separately identify markups, markdowns, and productivity using production and cost data. I use the model to examine the effects of consolidation in the Chinese cigarette manufacturing industry. I find that consolidation led to an increase in intermediate input price markdowns of 30%, but to only a slight drop in cigarette price markups. Although industry consolidation was defended as a means to spur productivity growth, I find that it actually lowered aggregate productivity.

Uncertainty‐driven business cycles: Assessing the markup channel

Precautionary pricing and increasing markups in representative‐agent DSGE models with nominal rigidities are commonly used to generate negative output effects of uncertainty shocks. We assess whether this theoretical model channel is consistent with the data. Three things stand out. First, consistent with precautionary wage setting, we find that wage markups increase after uncertainty shocks. Second, the impulse responses of price markups are largely inconsistent with the standard model, both at the aggregate as well as the industry level. Finally, and in contrast to times‐series evidence, our theoretical model robustly predicts that uncertainty shocks have a quantitatively small impact on the economy.

Application of the markup pricing method as an alternative to the non-cost-based model for airport charges

Abstract The experience of developed countries shows that airport managers seek to increase their profitability, while regulatory agencies aim to guarantee quality, investments and fair charges. This study presents an application of the Tornqvist Index and the markup pricing method to find the market price opportunity for airfares and one of the specific objectives is to present a methodology for comparing the financial results of airports based on ANAC Resolution No. 350/14, which allows a 100% increase in aeronautical charges concerning the tariff ceiling. To predict passenger demand with new airport fares, the least-squares method was used based on empirical equations and the concept of elasticity. The scenario used was the Campinas / Viracopos Airport from January 2014 to March 2017. The results showed that it is possible to increase the price of the domestic aeronautical charges and the revenue from the airport, with the counterpoint of falling demand. This method, based on cost and market opportunity, but on which the financial statement should be audited, is shown to be promising to increase airport revenue.

The Cyclical Behavior of the Price‐Cost Markup

AbstractA countercyclical markup of price over marginal cost is a key transmission mechanism for demand shocks in New Keynesian (NK) models. This paper reexamines the foundation of those models by studying the cyclicality of the price‐cost markup in the private economy. We find that how the markup is measured matters for its unconditional cyclicality. Measures of the markup based on the inverse of the labor share are moderately procyclical, but are moderately countercyclical for some generalizations of the production function. NK models predict that the cyclicality of the markup should vary depending on the nature of the shock. Consistent with the NK model, we find that the markup is procyclical conditional on total factor productivity shocks and countercyclical conditional on investment‐specific technology shocks. In contrast, we find that the markup increases in response to a positive demand shock. Thus, the transmission mechanism for the effects of demand shocks in sticky‐price NK models is not consistent with the data.

Price mark-up on the street sales of prescription pharmaceuticals in Australia

ABSTRACT Background: This study aims to compare the price difference between the official price for pharmaceutical drugs and the price when sourced from the black market in Australia. Methods: Drug prices recorded on the StreetRx database between 2014 and June 2018 were retrieved and the base pharmacy dispensed price was also retrieved from the Australian Pharmaceutical Benefits Scheme (PBS) website. The difference in Australian dollars between the street and base pharmacy dispensed prices for each mg of drug was calculated and the price mark-up per mg for each drug was compared. Results: 2704 reports were made for Australia between 2014 and 2018 on StreetRx. Buprenorphine accounted for 26% of all reports. After the number of reports for each drug was adjusted to their respective defined daily dose (DDD)/1000 persons/day bromazepam was the most commonly reported drug with 413.2 reports per DDD/1000/day, clonazepam (399.9), lisdexamphetamine (177.1) and oxycodone (138.4), respectively. The mark-up on opioids was the highest. Of the opioids, fentanyl’s median price mark-up per mg was the highest (90 AUD). Conclusion: This study has shown that users of prescription medication pay a significant mark-up for those drugs on the street. This is a measure of the perceived value by those misusing drugs.

Solving the problem of access to cardiovascular medicines: revolving fund pharmacy models in rural western Kenya

Availability of medicines for treatment of cardiovascular disease (CVD) is low in low-income and middle-income countries (LMIC). Supply chain models to improve the availability of quality CVD medicines in LMIC...

Determinants of Urban Land Lease Market in an Emerging Economy: Empirical Evidence from Ethiopia

Purpose: The ultimate objective of the study is to examine the determinants of the urban land lease market in an emerging economy with empirical evidence from Ethiopia. Design/Methodology/Approach: A nomothetic methodology with a standardized and quantitative method of data analysis was adopted for this study. The data was gathered from the Mekelle municipality between 2014-2019. The data was analyzed using the pooled ordinary least square technique. The model produced robust relationships and consistent results with previous studies. Findings: The study found both supply and demand-driven factors associated with plot markup price. The findings revealed that plot size, payment period, monthly income, plots accessible to basic services, plot location, land use type, and land lease auctioned period associated positively and significantly with the urban land lease markup price. Auctioneers paid a premium for plots having a larger size, extended payment period, access to basic services, and specified for residential housing. On the other hand, distance, and plot inaccessible to basic services associated negatively and significantly with the urban land lease markup price. Practical Implication: The rapid urbanization in Ethiopia has generated intensified supply and demand-driven challenges for public policy. Hence, the municipality should enhance infrastructure development across all plot locations and exercise strict control of land speculation to increase municipal revenue, and address supply and demand-driven challenges. Moreover, the municipal government should ensure equitable access to urban land by controlling land speculation. Originality/Value: Several studies that have assessed urban land expansion and administration, however, paid less attention to the urban land lease market. Furthermore, in an economic sense, it is crucial to examine the urban land value determinants from both demand and supply side at a time when less attention has been paid thereto in the literature.

Markup dynamics and financial frictions: The Spanish case

In this paper, we estimate price markups on a panel of Spanish manufacturing firms for the period 2000–2012 ​at a 3-digit sectoral level. Our results reveal that there is no evidence of large market power in the industries considered; however, in around 60% of these industries average markups either increased or remained stable over the crisis (2008–2012), despite the sharp fall in economic activity. We examine whether this result is related to the extremely tight financial conditions faced by Spanish corporations during the crisis. In this setting, firms may try to boost current profits by increasing markups –and possibly foregoing market share– to cover their financial commitments and fund their operations. We find a positive association between our measure of financial pressure and the estimated change in average markups between 2000-2007 and 2008–2012. This result suggests that those manufacturing industries more exposed to financial shocks by the end of the expansionary period tended to experience a larger increase in markups over the crisis.

Kekuatan Pasar (Market Power) dan Pangsa Ekspor Produk Ban (HS4011) Indonesia dan Negara Pesaing di Malaysia dan Filipina

The exporters of Indonesian and Thailand tire products have the same capability in price mark-ups in the Malaysian market. The price mark-up capability of tire exporters from Indonesia, Thailand and China is greater than the domestic tire industry in the Philippines. However, China has a greater share of tire exports in the Malaysian and Philippine markets and is likely related to China's ability to be able to increase the export composition of various types of tires. Indonesia needs to encourage the domestic tire industry to increase the production capacity of various types of tires through investment and relocation of the tire industry to Indonesia amid the downward trend in China's manufacturing industry. Need to develop tire products for the types of trucks, buses, tractors and heavy equipment that are often used in the construction, agriculture, mining and cargo transportation ports to enlarge market share in Malaysia and the Philippines because Indonesia has competitiveness from the aspect of raw materials. The potential export of various types of tires in the two export destination countries is a challenge to increase the number of exports of Indonesian tire products.

What's Wrong with Annuity Markets?

The annuity market in the US has been historically small. What drives this fact? The annuity market could be small because of adverse selection or supply-side frictions in insurance markets. Identifying demand- and supply-side frictions is difficult without data separately measuring exogenous shocks and endogenous responses. In this paper, we provide a novel identification using annuity price data and regulatory capital requirements. Using publicly available data, we document a robust relationship between shocks originating in the corporate bond market and annuity price markups. We show that this relationship supports a standard model of adverse selection with an incomplete bond market.

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.

A Structural Characterization of Market Power in Electric Power Networks

We consider a market in which capacity-constrained generators compete in scalar-parameterized supply functions to serve an inelastic demand spread throughout a transmission constrained power network. The market clears according to a locational marginal pricing mechanism, in which the independent system operator (ISO) determines the generators' production quantities to minimize the revealed cost of meeting demand, while ensuring that network transmission and generator capacity constraints are met. Under the stylizing assumption that both the ISO and generators choose their strategies simultaneously, we establish the existence of Nash equilibria for the underlying market, and derive an upper bound on the allocative efficiency loss at Nash equilibrium relative to the socially optimal level. We also characterize an upper bound on the markup of locational marginal prices at Nash equilibrium above their perfectly competitive levels. Of particular relevance to ex ante market power monitoring, these bounds reveal the role of certain market structures---specifically, the \emph{market share} and \emph{residual supply index} of a producer---in predicting the degree to which that producer is able to exercise market power to influence the market outcome to its advantage. Finally, restricting our attention to the simpler setting of a two-node power network, we provide a characterization of market structures under which a Braess-like paradox occurs due to the exercise of market power---that is to say, we provide a necessary and sufficient condition on market structure under which the strengthening of the network's transmission line capacity results in the (counterintuitive) increase in the total cost of generation at Nash equilibrium.

Sustainable inventory policy for an imperfect production system with energy usage and volume agility

A sustainable production inventory model that addresses some of the pragmatic scenarios of the production process is developed. The production process is considered imperfect which results in the production of some imperfect quality items with known distribution. The imperfect products are managed through an efficient rework process that makes the items suitable to be vended at their original markup price only. The agile nature of the manufacturing process is considered. And, the energy usage and carbon emission in the production process is also considered. Undoubtedly, the fundamental nature of demand is sensitive to price. Thus, the model incorporates the demand to be price-contingent. The objective is to maximize the overall inventory turnover by conjointly optimizing the selling price, production rate, and production time. A numerical example is included to validate the model. Further, the sensitivity analysis unfolds valuable managerial insights for decision-makers. Findings suggest that the model with the insertion of volume agility effect performs better when compared with the one without the volume agility.

Taxation, credit frictions and the cyclical behavior of the labor wedge

Labor-income and consumption taxes are often referred to as the primary causes of the labor wedge and differences in hours worked across countries. While this can be potentially true in the long run, its premise for explaining the cyclical behavior of the labor wedge is questionable. Using US data over 1955–2019, this paper first studies whether taxation explains the cyclical behavior of the labor wedge. It is shown that the tax wedge, which combines both types of taxes, fails in accounting for the countercyclicality of the labor wedge. I then study other factors that may raise the labor wedge during recessions, such as credit frictions on the firms’ side and price markups, and find that credit frictions are the primary reasons for this behavior. The empirical findings are consistent with the model-based results; the model with credit frictions successfully generates a countercyclical behavior of the labor wedge, whereas the model without credit frictions does not.

Alternative facts regarding the labor share

In this paper, I examine the impact of alternative hypotheses about the measurement of firms' investments in intangible capital on the labor share and markups of price over marginal costs.

Impacts of the zero mark-up drug policy on hospitalization expenses of COPD inpatients in Sichuan province, western China: an interrupted time series analysis

BackgroundSince 1950, the hospitals had been permitted to take a 15% mark-up of drug purchase price to remedy the loss of public hospitals and doctors’ salaries in China due to tight government budget. This policy resulted in an increasing over-prescriptions which increased burden for patients eventually. The soaring medical expenditures prompted Chinese government to launch the zero mark-up drug policy (ZMDP) in 2009, which aims to eliminate physicians’ financial incentives and lighten patients’ economic burden through cancelling the 15% mark-up. The purpose of this study is to assess the impacts of the ZMDP on hospitalization expenses for inpatients with chronic obstructive pulmonary disease (COPD) in western China.MethodAn interrupted time series was used to assess the impact of the ZMDP in 25 tertiary hospitals of Sichuan province, in which the policy was implemented in 2017. Monthly average total hospitalization expenses including drug expenses, medical service expenses and diagnosis expenses of COPD inpatients were analyzed with segmented regression model developed from January 2015 to June 2018.ResultsAfter the intervention of the ZMDP, the total hospitalization expenses of COPD patients significantly decreased immediately by 1022.06 CNY (P = .011). The post-policy long-term trend was decreasing by 125.32 CNY (P < .001) per month compared to the pre-policy period. The drug expenses kept downward trend both before and after the policy implementation. It had decreased by 46.42 CNY (P < .001) per month on average before the policy implementation and then dropped 1073.58 CNY (P < .001) immediately after the policy was implemented. Meanwhile, the medical service expenses had an increasing baseline trend of 14.93 CNY (P < .001) per month before the policy intervention, but it increased 197.75 CNY immediately after the policy was implemented (P = .011). The pre-policy period long-term trend of diagnosis expenses had increased by 25.78 CNY (P < .001) per month and decreased immediately by 310.78 CNY (P = .010). The post-policy trend was decreasing by 35.60 CNY (P = .001) per month compared to the pre-policy period.ConclusionOur study suggested that the ZMDP have been an effective intervention to curb the increase of hospitalization expenses for inpatients with COPD, especially the drug expenses in western region of China.

Competition is (still) a tough weed: A review essay of Thomas Philippon’s The great reversal: How America gave up on free markets

In The Great Reversal, Philippon makes the case that competition in America has weakened during the past two decades. His book contributes to the rapidly developing literature on the macroeconomic consequences of market power. I argue that Philippon fails to convincingly support his hypothesis because (1) he does not consider competition as a process operating on several margins, with the price being only of them, and (2) the available empirical data does not unambiguously show a rise in market power. Philippon’s work suffers from similar flaws as the “structure-conduct-performance” paradigm. I also incorporate recent attempts to estimate aggregate market power and explain why the methods used for such estimations are calculated by making assumptions over which margins entrepreneurs compete and suffers from serious knowledge problems. Finally, I offer an alternative view of competition, which focuses on how and at what speed rents are being dissipated instead of the markup of price over marginal cost.

Competition Is (Still) a Tough Weed: A Review Essay of Thomas Philippon’s the Great Reversal

In The Great Reversal, Philippon makes the case that competition in America has weakened during the past two decades. His book contributes to the rapidly developing literature on the macroeconomic consequences of market power. I argue that Philippon fails to convincingly support his hypothesis because (1) he does not consider competition as a process operating on several margins, with the price being only of them, (2) The available empirical data does not unambiguously show a rise in market power. Philippon's work suffers from similar flaws as the structure-conduct-performance paradigm. I also review the recent attempts to estimate aggregate market power and explain why the methods used for such estimations are calculated by making assumptions over which margins entrepreneurs compete and suffer from serious knowledge problems. Finally, I offer an alternative view of competition which focuses on how and at what speed rents are being dissipated instead of the markup of price over marginal cost.

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.