Technology Adoption, Market Power, and the Dual Dynamics of Value Premium and Markups *

Abstract

This paper examines how technology adoption and market power jointly explain two significant macroeconomic trends in recent decades: the decline of the value premium and the rise of markups. Empirically, we demonstrate that these trends are predominantly concentrated among high-markup firms, whereas both the value premium and markups remain stable for firms with low markups. To rationalize these patterns, we develop a dynamic monopolistic competition model with endogenous technology adoption and strategic interactions. Our analysis highlights that the observed trends-and their cross-sectional divergence between high-and low-markup firms-emerge from two critical mechanisms: (1) the rising efficiency of the aggregate technology frontier over time, and (2) firm heterogeneity in technology adoption decisions and demand elasticity. The model replicates the empirical dynamics of markups and the value premium, underscoring the interplay between technological evolution and market structure.

Keywords: value premium, markup, technology adoption, technology frontier shocks