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How Costly Are Markups?

Chris Edmond (), Virgiliu Midrigan () and Yi Xu ()

No 24800, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenously variable markups. We find that the welfare costs of markups are large. We decompose the costs of markups into three channels: (i) an aggregate markup that acts like a uniform output tax, (ii) misallocation of factors of production, and (iii) an inefficiently low rate of entry. We find that the aggregate markup accounts for about two-thirds of the costs, misallocation accounts for about one-third, and the costs due to inefficient entry are negligible. We evaluate simple policies aimed at reducing the costs of markups. Subsidizing entry is not an effective tool in our model: while more competition reduces individual firms' markups it also reallocates market shares towards larger firms and the net effect is that the aggregate markup hardly changes. Size-dependent policies aimed at reducing concentration can reduce the aggregate markup but have the side effect of greatly increasing misallocation and reducing aggregate productivity.

JEL-codes: D04 E02 L1 O4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com and nep-mac
Date: 2018-07
Note: EFG IO ME PR
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