Prices under Innovation: Evidence from Manufacturing Firms

Jordi Jaumandreu and Shuheng Lin

No 13146, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how ï¬ rms’ innovations impact prices with endogenous productivity and markup, under imperfect competition and dynamic pricing. Absent innovation, productivity plus markup changes curb price growth to half of variable inputs cost growth. Innovation’s additional impact on costs is negatively correlated with markup changes. We detect two prevalent strategies. When marginal cost goes down, ï¬ rms cash-in innovation by increasing the markups to enlarge proï¬ ts. When marginal cost goes up, ï¬ rms practice countervailing pricing by decreasing markups. With no innovation aggregate manufacturing price growth had multiplied by 1.4, but innovation without cash-in strategies had multiplied it by 0.8.

Keywords: Price indices; Marginal cost; Markup; Innovation (search for similar items in EconPapers)
JEL-codes: D43 L11 L16 O31 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-com, nep-cse, nep-eff, nep-hme, nep-ind, nep-ino and nep-tid
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Working Paper: Prices under Innovation: Evidence from Manufacturing Firms (2018)
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