Rising Markups and the Role of Consumer Preferences

We characterize the evolution of markups for consumer products in the United States from 2006 to 2019. Using detailed data on prices and quantities for products in more than 100 distinct product categories, we estimate flexible demand systems and recover markups under an assumption that firms set prices to maximize profit. Our empirical strategy obtains a panel of consumer preferences and marginal costs based on the estimation of separate random coefficient models by category and year. We find that markups increased by about 30 percent on average over the sample period. The change is primarily attributable to decreases in marginal costs, as real prices only increased slightly from 2006 to 2019. Our estimates indicate that consumers have become less price sensitive over time.

Keywords: Market Power, Markups, Demand Estimation, Consumer Products, Retailers

JEL Classification: D2, D4, L1, L2, L6, L81

Suggested Citation: Suggested Citation

Döpper, Hendrik and MacKay, Alexander and Miller, Nathan and Stiebale, Joel, Rising Markups and the Role of Consumer Preferences (June 05, 2024). Harvard Business School Strategy Unit Working Paper No. 22-025, Georgetown McDonough School of Business Research Paper No. 3939126, Available at SSRN: https://ssrn.com/abstract=3939126 or http://dx.doi.org/10.2139/ssrn.3939126