Profiting from Innovation: Firm Level Evidence on Markups

Bruno Cassiman and ,
Authors registered in the RePEc Author Service: Stijn Vanormelingen

No 9703, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: While innovation is argued to create value, private incentives of firms to innovate are driven by what part of the value created firms can appropriate. In this paper we explore the relation between innovation and the markups a firm is able to extract after innovating. We estimate firm-specific price-cost margins from production data and find that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the firm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the firm's patenting and promotion behavior, the age of the firm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the firm's markup.

Keywords: Markup; Process innovation; Product innovation; Productivity (search for similar items in EconPapers)
JEL-codes: D24 L11 O31 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-com, nep-cse, nep-ind, nep-ino and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: Profiting From Innovation: Firm Level Evidence on Markups (2013)
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