Rising Markups and the Role of Consumer Preferences
Harvard Business School Strategy Unit Working Paper No. 22-025
Georgetown McDonough School of Business Research Paper No. 3939126
81 Pages Posted: 11 Oct 2021 Last revised: 24 Apr 2023
Date Written: June 05, 2024
Abstract
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