Energy, Inflation and Market Power: Excess Pass-Through in France

Axelle Arquie () and Malte Thie ()
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Axelle Arquie: CEPII
Malte Thie: CEPII and Université Paris Dauphine

No 220-2023, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: We explore how, in the French manufacturing sector, producer prices vary with market power during a severe episode of energy price hikes (between January 2020 and February 2023). Our work provides some empirical evidence in favor of a role for firms' market power in explaining inflation, and in favor of the "sellers' inflation" hypothesis (Weber and Wasner (2023)): in less competitive sectors, firms could use the energy price hike to increase their prices more than warranted by actual changes in costs. Using a rich dataset on French manufacturing firms' balance sheets, we first estimate markups at the firm-level, and aggregate them at the sectoral level. We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors. We show that, in sectors with higher markups, prices increase relatively more: in the least competitive sector, firms pass through up to 110% of the energy shock, implying an excess pass-through of 10 percentage points. In addition, we find that the association between markup and pass-through is even higher when markup dispersion is low, consistent with the argument that firms engage in price hikes when they expect their competitors to do the same.

Keywords: Inflation; Markups (search for similar items in EconPapers)
JEL-codes: E31 F4 L11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2023
New Economics Papers: this item is included in nep-com, nep-ene, nep-mon and nep-reg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:220-2023

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