Markups and markdowns

Mauro Caselli, Stefano Schiavo and Lionel Nesta

No 2017-11, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: This paper studies the high yet undocumented incidence of firms displaying markups lower than unity, i.e., prices lower than marginal costs, for protracted periods of time. Using a large sample of French manufacturing firms for the period 1990-2007, the paper estimates markups at the firm level and documents the extent to which firms exhibit negative price cost margins. The paper is able to provide an explanation for this phenomenon using the option value approach to investment decisions. The results suggest that firms facing higher investment irreversibility tend to continue operating even when prices fall below marginal costs as they wait for market conditions to improve. This effect is magnified in the presence of uncertainty.

Keywords: Markups; irreversibility; uncertainty; negative price-cost margins; French manufacturing data (search for similar items in EconPapers)
JEL-codes: D22 D24 D81 E22 L11 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-com, nep-eur and nep-mac
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http://www.ofce.sciences-po.fr/pdf/dtravail/WP2017-11.pdf (application/pdf)

Related works:
Journal Article: Markups and markdowns (2018)
Working Paper: Markups and markdowns (2018)
Working Paper: Markups and markdowns (2018)
Working Paper: Markups and markdowns (2018)
Working Paper: Markups and markdowns (2017)
Working Paper: Markups and markdowns (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:1711

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