Market Power in Latin America in Worldwide Perspective: An Empirical Exploration

Rodrigo Heresi

No 13610, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: While there is widespread evidence of increasing markups in the United States and other developed economies in the last several decades, little is known about that evolution in developing economies, particularly Latin American countries. Using a harmonized dataset on listed firms from 70 countries in the period 2000-2022, I document four stylized facts about market power--measured as price-cost markups--in the six largest Latin American economies from a worldwide perspective. First, average markups in LAC are high relative to other emerging and developed economies, although they have slightly declined from prevailing levels during the commodity boom period. Second, aggregate markup dynamics are primarily driven by already high-markup firms in the top decile of the markup distribution, with little changes in the market power measured for the remaining nine deciles. Third, in contrast to the prediction of most theories about endogenously variable markups, I document a nonlinear relationship between firm-level markups and size, which is significantly negative for most of the size distribution and significantly positive for very large corporations. Fourth, the relationship between markups and investment depends heavily on the markup level. For a typical firm with median market power, a 1% increase in its markup implies a 0.86% rise in the investment rate. In contrast, for firms at the 99th percentile of the markup distribution, a 1% increase in its markup implies a -0.44% reduction in investment.

Keywords: Market power; pricing; Firm size; TFP (search for similar items in EconPapers)
JEL-codes: D22 D24 L11 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-com, nep-dev, nep-ind and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:13610

DOI: 10.18235/0013036

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