The Effects of Local Demand and Supply Restrictions on Markup

73 Pages Posted: 6 Jul 2022

See all articles by Antonio Acconcia

Antonio Acconcia

CSEF - University of Naples Federico II

Elisa Scarinzi

Bank of Italy

Date Written: June 22, 2022

Abstract

Markup fluctuations are often the combined outcome of sources of variability with conflicting effects. We exploit a natural experiment framework based on episodes of unanticipated cuts in city council spending and of firm exits from the market to investigate the markup response to contractions in demand and supply. A temporary contraction in demand leads to a sharp reduction in the markups of differentiated goods, transport and business services, whereas it drives down labour costs in the retail, wholesale and accommodation sectors, without affecting markups. A persistent contraction in supply leads to a boost in markups, the magnitude of which is heterogeneous among firms, as those with the lowest markups tend to display the largest increases, while those with the highest markup mainly benefit in terms of new market shares. For retail and wholesale trade and for accommodation, the contraction in supply has a lasting effect. Province-level results taking into account spillovers across sectors and municipalities bring out the co-movement of markup and revenue. Overall, our findings point to labour market adjustments and the substitutability of workers to explain markup variability and suggest an increased sales-weighted aggregate markup following a recession.

Keywords: demand/supply contraction, markup, local competition, labor market, demand reallocation

JEL Classification: E30, D22, D40

Suggested Citation

Acconcia, Antonio and Scarinzi, Elisa, The Effects of Local Demand and Supply Restrictions on Markup (June 22, 2022). Bank of Italy Temi di Discussione (Working Paper) No. 1370, Available at SSRN: https://ssrn.com/abstract=4151337 or http://dx.doi.org/10.2139/ssrn.4151337

Antonio Acconcia

CSEF - University of Naples Federico II ( email )

VIA L. RODINO' 22
NAPOLI, 80132
Italy

Elisa Scarinzi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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