How Costly Are Markups? / Chris Edmond, Virgiliu Midrigan, Daniel Yi Xu.

Format:

Book

Author/Creator:

Edmond, Chris.

Contributor:

National Bureau of Economic Research.

Midrigan, Virgiliu.

Xu, Daniel Yi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24800.

NBER working paper series no. w24800

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenously variable markups. We find that the welfare costs of markups are large. We decompose the costs of markups into three channels: (i) an aggregate markup that acts like a uniform output tax, (ii) misallocation of factors of production, and (iii) an inefficiently low rate of entry. We find that the aggregate markup accounts for about two-thirds of the costs, misallocation accounts for about one-third, and the costs due to inefficient entry are negligible. We evaluate simple policies aimed at reducing the costs of markups. Subsidizing entry is not an effective tool in our model: while more competition reduces individual firms' markups it also reallocates market shares towards larger firms and the net effect is that the aggregate markup hardly changes. Size-dependent policies aimed at reducing concentration can reduce the aggregate markup but have the side effect of greatly increasing misallocation and reducing aggregate productivity.

Notes:

Print version record

July 2018.