Heterogeneity of Markups at the Firm Level and Changes During the Great Recession: The Case of Spain

38 Pages Posted: 5 Dec 2015

Date Written: December 4, 2015

Abstract

We broaden the conceptual framework of estimating markups at the sectoral level developed by Roeger (1995), and extended by Crépon et al. (2005) with labour market imperfections, to account for firm-level heterogeneity derived from differences in productivity. We estimate this model with a comprehensive panel of Spanish non-financial corporations for the period 2001-2007 to find that perfect competition is widely rejected in the data. More interestingly, within each sector, firms with higher productivity present higher markups. Further, we use this empirical setting to estimate changes in firm-level markups over the course of the crisis (2008/2012). Our results indicate that for around 50% of sectors average markups increased, following a decrease in the number of firms, while for around 35% of industries the relevance of within-sector markup heterogeneity decreased at the same time that the variance of within-sector TFP increased. This last result suggests that the simple changes in the number and composition of competing firms cannot explain within-sector markups and we require additional factors to account for recent developments. For instance, we provide evidence that both an increase in consumer product substitutability and in fixed entry costs during the crisis might be a good explanation.

Keywords: markups, production function, market power, heterogeneity

JEL Classification: C23, C26, D24, E31, L11, L16

Suggested Citation

Fernández, Cristina and Lacuesta, Aitor and Montero, Jose Manuel and Urtasun, Alberto, Heterogeneity of Markups at the Firm Level and Changes During the Great Recession: The Case of Spain (December 4, 2015). Banco de Espana Working Paper No. 1536. Available at SSRN: https://ssrn.com/abstract=2699023 or http://dx.doi.org/10.2139/ssrn.2699023

Cristina Fernández (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Aitor Lacuesta

Banco de España ( email )

Madrid 28014
Spain

Jose Manuel Montero

Banco de España ( email )

Madrid 28014
Spain

Alberto Urtasun

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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