Decomposing the Rise in Markups

Abstract

A recent literature argues that the rise in aggregate markups is due to economic activity reallocating toward high-markup firms rather than an increase in firm-level markups. I show that standard decomposition methods used to analyze this phenomenon estimate a non-zero reallocation effect even when the allocation is invariant. I propose a new decomposition which gives that the rise in the aggregate markup mainly comes from changes in the markup distribution rather than changes in the market share distribution. Finally, I show that the faster increase in the sales-weighted average markup compared to the cost-weighted average markup is an  indication that allocative efficiency has declined.

Keywords: Markups, Market Power, Decomposition, E25, L11, O40, Reallocation, D22

JEL Classification: D22, E25, L11, O40