Profiting from Innovation: Firm Level Evidence on Markups

54 Pages Posted: 22 Jan 2014

See all articles by Bruno Cassiman

Bruno Cassiman

IESE Business School; KU Leuven - Faculty of Business and Economics (FEB)

Stijn Vanormelingen

Hogeschool-Universiteit Brussel (HUBrussel); KU Leuven - Centre for Institutions and Economic Performance (LICOS)

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2013

Abstract

While innovation is argued to create value, private incentives of fi…rms to innovate are driven by what part of the value created …rms can appropriate. In this paper we explore the relation between innovation and the markups a fi…rm is able to extract after innovating. We estimate fi…rm-speci…c price-cost margins from production data and …nd 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 fi…rm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the fi…rm'’s patenting and promotion behavior, the age of the fi…rm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the fi…rm’s markup.

Suggested Citation

Cassiman, Bruno and Vanormelingen, Stijn, Profiting from Innovation: Firm Level Evidence on Markups (October 10, 2013). Available at SSRN: https://ssrn.com/abstract=2381996 or http://dx.doi.org/10.2139/ssrn.2381996

Bruno Cassiman (Contact Author)

IESE Business School ( email )

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KU Leuven - Faculty of Business and Economics (FEB) ( email )

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Belgium

Stijn Vanormelingen

Hogeschool-Universiteit Brussel (HUBrussel) ( email )

Stormstraat 2
Brussels, 1000
Belgium

KU Leuven - Centre for Institutions and Economic Performance (LICOS) ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium

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