Markups and export-pricing strategies

We analyze empirically export-price strategies across export destinations using detailed firm-product data. Most recent studies using disaggregated data to investigate why firms charge different prices for the same product on different markets focus on the cost component of prices and neglect the markup component. In this paper, we concentrate on the markup component and examine how variations in firms’ export prices may reflect price discrimination by comparing the markup of firms with different pricing strategies. We make use of detailed firm-level data for exporting firms in the Swedish food sector consisting of both manufacturing and intermediary trading firms. The paper documents the export-price variations within the two sub-sectors and explores how different price strategies correlate with markups. The results offer new information beyond the fact that exporters tend to have a higher markup. In particular, we find that firms in the food-processing sector with a greater ability to discriminate across markets mark their products up even more. This result points to the importance of underlying firm decisions in order to explain differences in export premiums across firms. In addition, the results reveal that markups are a complex function of firm and destination characteristics, and that the relationship between markups and pricing strategies in the manufacturing sector is not necessarily observed in other sectors of the supply chain.     

Misallocation in Chinese Manufacturing and Services: A Variable Markup Approach

Cross‐country comparison reveals an unusually small service sector in China. Using firm‐level data from China's 2008 economic census, we find two facts that speak to a novel mechanism of misallocation within service and between manufacturing and service sectors. First, compared with the manufacturing sector, there are more state‐owned enterprises and fewer entrants in the service sector. Second, markups increase with firm size, and the increase is more dramatic among service firms. We interpret these facts through the lens of a monopolistic competition model with heterogeneous firms and variable markups. A multisector model shows a new channel that translates asymmetric barriers to entry across sectors into sectoral markup differences, which in turn cause sectoral misallocation. Quantitative analysis shows that when reducing entry barriers to service firms to the extent observed for manufacturing firms, the model predicts a 12‐percentage‐point increase in the service employment share.     

Fixed costs,markups and concentration in Eswatini (Swaziland): A firm-level analysis of panel data

This paper documents the evolution of markups and concentration, detects causality between firm churning and markups/concentration, and determines the impact of fixed costs on markups. It relies on production data of Eswatini during 1994–2007 to estimate markups using the production approach. It finds elasticities, markups and concentration to be comparable with other findings elsewhere. Although no causality is found from a regression of markups/concentration to entry/exit dynamics an increase in productivity within high capital stock industries and in fixed costs raises average markups. Further research will focus on markup state dependence, unobserved heterogeneity, and endogenous regime switching to enhance understanding of markup pricing.     

Investigating Market Structure of the Greek Manufacturing Industry: A Hall-Roeger Approach

This paper investigates the market structure of the Greek manufacturing industry over the period 1984–2007 at the two-digit SIC level. Three models are used to investigate the competitive conditions of the manufacturing industry. The paper investigates factors affecting the markup of the Greek manufacturing industry by estimating two additional models, i.e., the markup cross-sectional model and the markup time-series model, for identifying both sectoral and intertemporal factors. The empirical results indicate that the whole Greek manufacturing industry, as well as each sector of the industry, operates in non-competitive conditions for each year during the period 1984–2007. The findings also support that labor intensity, the sector size, and the number of establishments influence the markup at the sectoral level, while labor intensity, and the growth and the number of establishments affect the markup over time.     

Assessing Productivity Gains from International Trade in a Small Open Economy

Empirical evidence suggests that exporter firms tend to charge higher markups than non-exporters due to trade barriers. The exporters’ markup premium, however, may disappear in a special case, namely when the home country is small relative to its trade partners and trade barriers are low. This can be because competition is more intense in the large export destination than in the small home country, so that firms are able to set higher markups for locally sold products but not for exports. This paper provides empirical evidence on the validity of this special case by estimating markups for firms in Luxembourg who generally export to larger countries. The estimated negative markup premium for exporters has important implications for the productivity measurement. In a sufficiently small open economy, exporters’ productivity may be biased downward, when the firm-level markup variation is not controlled for in the productivity estimation. The bias in the productivity estimates further leads to the inaccurate conclusion that openness to international trade lowers allocative efficiency.     

Competition in the Chinese market: Foreign firms and markups

This study addresses the issues of whether foreign firms outperform domestic firms in markups and whether the presence of foreign firms dampens the markup of their local counterparts in the Chinese market. Analysis of a firm-level panel dataset, we find foreign-invested enterprises (FIEs), particularly those not from Hong Kong–Macau–Taiwan, charging a higher markup. Estimations on the determinants of markups highlight the important roles played by technological capability and intangible assets. The potential channels and mechanisms are also discussed. Entering the Chinese market through joint ventures helps FIEs raise markups, and this effect is notable for HMT–FIEs, which might have a relative advantage of cultural proximity than other FIEs. Sharing equality with national capital to construct political connection (guanxi) also helps facilitate markups. Crucially, foreign presence is positively related to local firms’ markups, suggesting that the spillover and linkage effects dominate the competition pressure brought about by foreign direct investment.     

Competitive effects of trade: theory and measurement

In this paper, I develop a simple model of heterogeneous exporters to a single destination. This model highlights how the response of producer markups to market-level changes in that destination are intrinsically tied to the induced reallocation of export sales to that destination. I discuss how additional assumptions on the shape of demand (originally advocated by Alfred Marshall as his second law of demand) generate specific predictions for the response of those markups and induced product reallocations to increases in market size and competition in a destination: markups fall and market shares are reallocated towards better performing products. Recent evidence on French multi-product exporters strongly confirms this prediction for market share reallocations. The predictions for the markup responses are also consistent with the findings of the large empirical literature on pricing to market and incomplete pass-through.     

Markup Variation and Productivity Measurement in Singapore*

Conventional measures of total factor productivity using growth accounting may not be appropriate when there is variation in markups across industries. The existence of market power implies that total factor productivity contains an endogenous component related to the variation in markups. I examine the variation of markups at the industry level for the manufacturing and services sectors in Singapore from 1983 to 2003. Using two different measures, I find that the markups in Singapore are significant in most industries, at around 28 and 55percent for the manufacturing and services sectors, respectively. Markups for the services sector declined during the period, while the markups for the key manufacturing industries increased after the Asian financial crisis in 1997. Accounting for variation in markups suggests that improvement in technological progress tends to be underestimated by 0.5–1.0percent per year. The underestimation is more severe in industries with relatively high markups.     

Endogenous Markups,Intensity of Competition,and Persistence of Business Cycles

In order to study the propagation mechanism of business cycles, in particular to investigate how the intensity of competition affects market structure and output persistence over business cycles, this paper presents a real business-cycle model with imperfect competition and increasing returns to scale. This analysis considers the markups of price over cost to be endogenous. With endogenous markups, two standard forms of oligopolistic competition—Bertrand and Cournot—are considered. Results show that: (1) the propagation mechanism in the sense of output persistence is greater under Cournot; (2) the propagation mechanism is unequivocally greater with imperfect competition, regardless of whether markups are endogenous or not; and (3) under imperfect competition, the propagation mechanism is greater with endogenous markups than with exogenous markups. Overall, these results suggest that more intense competition produces lower persistence in output growth and, thus, a weaker propagation mechanism. In a calibration exercise, these differences were also found to be quantitatively important.     

Determinants of Individual-Firm Markup in Japan: Market Concentration, Market Share, and FTC Regulations

This paper estimates individual firm level markup for more than 400 major manufacturing firms in Japan. Our estimates suggest the presence of significant market power for most of these firms, due not only to market concentration but also to the firms' own market shares, as well as advertizing and sales promotion efforts. The paper then goes on to assess systematically the impact on estimated markups of regulatory measures taken by the Fair Trade Commission (FTC) of the Japanese Government. We find that non-punitive FTC activities are directed toward the right targets and are reasonably effective, whereas injunctions, the strongest measure endowed to the FTC, has essentially no effect on the markups of firms in our sample. J. Japan. Int. Econ., Dec. 1999, 13(4), pp. 424–450. Institute of Economic Research, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan; Institute for Social and Economic Research, Osaka University; and Faculty of Economics, University of Tokyo. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: L13, L41.     

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.     

Sectoral and aggregate estimates of the cyclical behavior of markups: Evidence from Germany

Sectoral and Aggregate Estimates of the Cyclical Behavior of Mark-ups: Evidence from Germany. — The paper presents evidence of the cyclical behavior of the price to marginal cost ratio for Germany. Average markups are estimated both for two-digit manufacturing industries and for the aggregate economy, the results being quite similar once the difference between gross output and and value-added markups is accounted for. Over the business cycle, markups appear to be countercyclical for most parameter constellations. This is interpreted as empirical support for business cycle theories that rely on aggregate demand shocks to affect markups inversely, thus producing procyclical real wages and productivity without having to assume technology shocks.     

Estimation of productivity and markups with price dispersion: Evidence from Chinese manufacturing during economic transition

We estimate firm productivity and markups in the presence of heterogeneous output and input prices. We assume that firms are monopolistically competitive in the output market and that state firms are favored and pay lower prices for inputs due to political connections. The proxy-variable (or called the control-function-based) approach of structurally identifying production functions and productivity is customized to our new setting. Our approach solves the underidentification problem inherent in the standard proxy-variable method. We investigate the Chinese transportation equipment industry and find evidence against perfect competition and price homogeneity. We also find that productivity and markup differentials and dynamics are consistent with the market-oriented reforms in China.     

Oil shocks and endogenous markups: results from an estimated euro area DSGE model

This paper estimates a linearised DSGE model for the euro area. The model is New Keynesian and allows for a role for oil usage and endogenous price markups. The importance of shocks to monetary policy and oil prices is estimated to have declined in the post-1990 period, in line with the higher predictability of policy and the fall in the persistence and—to a lesser extent—variability of oil disturbances. Counterfactual exercises show that oil efficiency gains would alleviate the inflationary and contractionary consequences of oil shocks, while higher wage flexibility would help ease the impact on real output at the expense of larger inflationary pressures. While we report evidence of “countercyclical” price markups, the rise in markups induced by an oil disturbance is not found to considerably amplify the inflationary and contractionary effects of the shock. The paper discusses the policy implications of our empirical results for the euro area economy.     

Towards a welfare model of trade and multinational firms with oligopolistic competition

This paper constructs a general equilibrium model in a world with two-symmetric countries. It explains welfare gains from international trade and horizontal Foreign Direct Investment (FDI) in the economy with firm heterogeneity and variable markups stemming from oligopolistic competition. My model shows that the pro-competitive effects of trade and horizontal FDI happen because trade openness induces an increase in product market competition that reduces markups and toughens selection, increasing aggregate productivity. The most significant contribution of the paper is that multinational firms, via horizontal FDI, produce the most significant welfare gains through the toughest selection and lowest markups.     

Trade Policy,Competition and Productivity: The Impact of EU Harmonization in the Dutch Food Processing Industry

Evidence broadly confirms that European Union (EU) harmonization of food regulations can be considered as a trade-promoting and market-integrating instrument in the Single Market. However, little is known on how this particular trade liberalization measure may impact total factor productivity (TFP). One of the general presumptions is that trade liberalization has a positive impact on productivity through the effect of competitive pressures to which domestic firms are exposed. For instance, as a result of lowering or removing regulatory barriers to trade, a decline in entry costs of foreign and domestic competitors leads to more competitive pressures which have a downward effect on prices and markups and higher TFP through a better reallocation of inputs. The overall evidence shown in this paper leads to the conclusion that the impact of EU harmonization on various TFP measures occurs through a markup mechanism: more EU harmonization results in more competition (lower markups) and greater TFP growth. We also investigate the impact of assumptions relating to market structure and the production function. We empirical test and refute the assumptions of perfect competition and constant returns to scale in our sample. The analysis is carried out at the level of Dutch food processing firms for the 1979–2005 period. We extend and built upon a new database on EU harmonization of regulations in the food industry. The product classification of this database follows the detailed Combined Nomenclature classification that codes the relevant harmonization initiatives of technical regulations at the product level.     

Empirical modeling of Japan’s markup and inflation, 1976–2000

This paper aims to pursue an empirical model of Japan’s markup and inflation using historical time series data covering the last quarter of the 20th century. A multivariate cointegration analysis of Japan’s macroeconomic data indicates the existence of a long-run economic linkage, which is interpreted as an empirical representation of countercyclical markup. A set of variables in the cointegrated system, apart from markup and inflation, are judged to be weakly exogenous for parameters of interest, thereby allowing us to estimate a partial model given these exogenous variables. The model reduction is then conducted so as to achieve a parsimonious representation of countercyclical markup and inflation dynamics over the sample period of interest.     

Fiscal Episodes and Market Power

We assess the effect of fiscal episodes, as determined via alternative approaches, on GDP and on markups in a panel of 14 OECD countries. Our results with narrative action-based data show counter-cyclicality since negative fiscal shocks increase markups. Additional empirical exercises reveal that spending-based consolidation programs have a more counter-cyclical effect on the behaviour of markups over the short and medium term than tax-based ones. Moreover, in times of economic contraction the degree of counter-cyclicality of negative (positive) government spending (tax) shocks is larger than during economic expansions.     

MODELLING INFLATION IN SOUTH AFRICA: A MULTIVARIATE COINTEGRATION ANALYSIS

We employ an expectations augmented Phillips curve framework to investigate the link between inflation, unit labour costs, the output gap, the real exchange rate and inflation expectations. Using multivariate cointegration techniques, we find evidence consistent with mark‐up behaviour of output prices over unit labour costs. Most importantly, we find that the mark‐up in the South African economy is much higher than in the U.S. For South Africa we find a markup of about 30 per cent: three times as high as the 10 per cent markup found for the U.S.     

An open economy general equilibrium model with heterogeneous producers, a homothetic utility function and endogenous elasticity

Recent monopolistic competition models have identified three main sources of the gains from trade: (1) the introduction of new varieties for consumers, (2) an improvement in efficiency through the exit of low-productivity firms, and (3) a reduction in firms’ markups through import competition. In this paper, we extend Feenstra (Economics Letters, 78(1):79–86, 2003) to develop a model with producers heterogeneous in productivity to capture these gains. Here, firm markups are decreasing with market share, and trade introduces new varieties to consumers and reduces the market share of domestic firms. This reduces markups and profits and forces low-productivity firms to exit. This pro-competitive effect on the distribution of productivity contrasts with the conventional export-driven mechanism in a constant elasticity setup. We can usefully extend this model for further study because of the homotheticity of the utility function and the tractability of the model.