Markups, City Size, and Exports: Evidence from Japan
Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)
The present study deals with variations in markups between and within cities in the Japanese manufacturing sector using the markups estimated at the establishment level. Recent models on monopolistic competition with endogenous price-cost markups show that markups in larger cities are lower since competition is tougher in larger cities. With respect to the within-city variation in markup, firms producing differentiated products at lower costs charge higher markups. This empirical study supports these theoretical predictions. The findings suggest that markups are partly balanced between establishment and regional factors when highly productive, large establishments are located in large cities. Furthermore, this study finds that exporting establishments face global competition in export markets, similar to large domestic markets. Therefore, highly productive, large establishments can export their products by charging high markups.
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