How Costly are Markups?

52 Pages Posted: 16 Jul 2018

See all articles by Chris Edmond

Chris Edmond

University of Melbourne - Department of Economics

Virgiliu Midrigin

New York University (NYU) - Department of Economics

Daniel Yi Xu

Duke University

Date Written: July 2018

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.

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Suggested Citation

Edmond, Chris and Midrigin, Virgiliu and Yi Xu, Daniel, How Costly are Markups? (July 2018). NBER Working Paper No. w24800. Available at SSRN: https://ssrn.com/abstract=3214343

Chris Edmond (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Virgiliu Midrigin

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

Daniel Yi Xu

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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