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Markups, Market Power and Implications
Jan De Loecker1 Jan Eeckhout2
1KU Leuven, NBER and CEPR2University College London and UPF
Bruegel
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Background
• Secular trends: concentration, profits, investment, labor market.
• Market Power: common cause?
• Until recently little known:
1. Measurement: markups – not concentration ratios (HHI),
2. Data: long panel of relevant firms,
3. Focus on aggregates or case-studies.
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The topic of conversation: markups?
• Recent attention micro-based aggregate markups in US, and other
regions – e.g. De Loecker and Eeckhout (2017, 2018).
• Debate at various high-level policy circles (ECB Sintra, Jackson Hole,
etc.) and among antritrust professionals, about the rise (or not) of
markups and therefore market power.
• Potentially large implications for studying aggregates:
• Labor market outcomes: wages, labor share and income inequality.
• Role of competition and trade policy.
• Inflation or lack thereof: rising markups and no inflation?
• Productivity growth measurement.
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Roadmap
1. Methodology and data sources
2. Major patterns
3. Macroeconomic implications
4. Potential drivers
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Data
• Listed firms (Compustat and Worldscope)
• Census: US and rolling across 10+ other countries
• Discuss pro and cons.
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Methodology and data sources
• Challenging to measure (economic) profits and therefore market power.
• Markups, Pc , are good indicator but how to correctly measure it?
• Production Approach
1. Rely on firm-level production, revenue and expenditure data.
2. Compare cost and revenue share:
wL
PQ︸︷︷︸data
6= wL
cQ︸︷︷︸model
3. Consider aggregate across industry/region.
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Producer Behavior
• Define markup µ = Pλ or
µit = θVitPitQit
PVit Vit
.
depending on Sales Sit = PitQit and expenditure share θVit , which is
specific to technology
• DLE and DLEU consider two distinct technologies.
Mt =∑i
sitµit (1)
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United States (Compustat & US Census)
Secular Increase since 1980: 40 pts
.1.2
1.3
1.4
1.5
1.6
1960 1970 1980 1990 2000 2010
1
1.1
1.2
1.3
1960 1970 1980 1990 2000 2010
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Driver aggregate pattern: superstar firms
• Aggregate useful for macro-analysis and policy discussion, hides
massive heterogeneity.
• Visualize by showing percentiles (sales-weighted) and markup
distribution over time.
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Markup Percentiles and dispersion
All Action in Upper Half Distribution
1
1.5
2
2.5
1960 1970 1980 1990 2000 2010
AverageP90P75P50
0
.5
1
1.5
2
1 2 3
20161980
• Robust across industries and countries.
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Reallocation: natural consequence
1.20
1.30
1.40
1.50
1980 1990 2000 2010
Markup (benchmark)WithinReallocationNet Entry
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Markup = Market Power?
Profit Rate: + 7 ppt
0
.02
.04
.06
.08
.1
1960 1970 1980 1990 2000 2010
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Markup = Market Power?
External validity Market Cap-sales
.5
1
1.5
Mar
ket V
alue
Sha
re
1.2
1.3
1.4
1.5
1.6
Mar
kup
1960 1970 1980 1990 2000 2010
MarkupMarket Value Share
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Measurement and aggregation (DLE 2018)
1. Variable (COGS) versus (quasi)fixed (SGA):
• Combine COGS and SGA relies on perf. substitutes and flexibility
(variable) yielding net-profit rate (excl capital)
• Implied profits require netting out fixed costs (SGA)
2. Aggregation: using representative firm framework is invalid and
counterfactual. Using correct scale economies and heterogeneity in
underlying markup distribution yields observed aggregate profit share
when using:
Πs =∑i
si1
µi− F
S
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Pictures from the US: measurement
• Sum all of COGS and SGA (adv, marketing, RD, brand value, CEO
comp.) into input bundle and apply DLW:
0
.02
.04
.06
.08
.1
profi
t rat
e
1.08
1.1
1.12
1.14
1.16
1.18
tau
1960 1970 1980 1990 2000 2010
tauprofit rate .1
.12
.14
.16
.18
profi
t rat
e (w
ithou
t Cap
ital)
1.08
1.1
1.12
1.14
1.16
1.18
tau
1960 1970 1980 1990 2000 2010
tauprofit rate (without Capital)
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Pictures from the US: aggregation
0
.1
.2
.3
.4
1980 1990 2000 2010
Avg, No FCAvg, FCAggr, No FCAggr, FC (PF1)Profit Rate
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Global Markup
Secular Increase since 1980: +50 pts
1.1
1.2
1.3
1.4
1.5
1.6
1980 1990 2000 2010
GLOBAL
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Global Markup
Densities
0.5
11.5
2
1 2 3
20161980
.75
11.
251.
51.
752
Mar
kup
2016
.75 1 1.25 1.5 1.75 2Markup 1980
0.0110.0100.0090.0080.0070.0050.0040.0030.0020.0010.000
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Evolution of Elasticities and Cost Shares
pVVpVV+rK
and θV
.82
.84
.86
.88
.9
.92
1960 1970 1980 1990 2000 2010
Elasticity VCost Share V
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Markup Continents
1
1.2
1.4
1.6
1.8
1
1.2
1.4
1.6
1.8
1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010
EUROPE NORTH AMERICA SOUTH AMERICA
ASIA OCEANIA AFRICA
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Markup for Individual Countries
>1.75(1.5,1.75](1.25,1.5][1,1.25]No data
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Markup for Individual Countries
2016 change?
Global Average 1.59 +0.52
Europe 1.64 +0.66
1 Denmark 2.84 +1.95
2 Switzerland 2.72 +1.63
3 Italy 2.46 +1.46
4 Belgium 2.06 +1.03
5 Greece 1.80 +0.85
6 United Kingdom 1.68 +0.74
7 Norway 1.60 +0.74
8 Ireland 1.82 +0.66
9 France 1.50 +0.53
10 Sweden 1.31 +0.50
11 Netherlands 1.52 +0.47
12 Finland 1.36 +0.44
13 Austria 1.33 +0.41
14 Spain 1.34 +0.33
17 Germany 1.35 +0.29
16 Portugal 1.19 –0.06
North America 1.76 +0.63
1 United States 1.78 +0.63
2 Canada 1.53 +0.61
3 Mexico 1.55 +0.17
Africa 1.38 +0.32
1 South Africa 1.34 +0.07
2016 change?
Asia 1.45 +0.43
1 South Korea 1.48 +0.72
2 Hong Kong 1.65 +0.41
3 India 1.32 +0.34
4 Japan 1.33 +0.30
5 Indonesia 1.50 +0.22
6 Thailand 1.44 +0.21
7 Malaysia 1.33 +0.03
8 Pakistan 1.17 –0.01
9 Taiwan 1.24 –0.15
10 Turkey 1.16 –0.32
11 China 1.41 –0.45
12 Philippines 1.50 –0.77
Oceania 1.55 +0.56
1 Australia 1.57 +0.57
2 New Zealand 1.35 +0.37
South America 1.59 +0.01
1 Argentina 1.45 +0.64
2 Colombia 1.56 +0.41
3 Brazil 1.61 –0.01
4 Peru 1.64 –0.04
5 Venezuela 1.47 –0.46
6 Chile 1.37 –2.25
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North America, Africa, Oceania
1
1.5
2
1
1.5
2
1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010
CANADA UNITED_STATES MEXICO
SOUTH_AFRICA AUSTRALIA NEW_ZEALAND
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South America
1
2
3
4
1
2
3
4
1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010
ARGENTINA BRAZIL CHILE
COLOMBIA PERU VENEZUELA
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Asia
.5
1
1.5
2
.5
1
1.5
2
.5
1
1.5
2
1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010
CHINA HONG_KONG INDIA INDONESIA
JAPAN MALAYSIA PAKISTAN PHILIPPINES
SOUTH_KOREA TAIWAN THAILAND TURKEY
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Europe
11.52
2.53
11.52
2.53
11.52
2.53
11.52
2.53
1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010
AUSTRIA BELGIUM DENMARK FINLAND
FRANCE GERMANY GREECE IRELAND
ITALY NETHERLANDS NORWAY PORTUGAL
SPAIN SWEDEN SWITZERLAND UNITED_KINGDOM
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Change in Markup
>1(0,1][-1,0]<-1No data
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Listed firms: Representative?
• US census confirm Compustat (logic)
• China census confirm Worldscope
• Program in progress cross-country census data
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China
1
1.2
1.4
1.6
1.8
1980 1990 2000 2010
CHINA
���
����
���
����
���
����
08
���� ���� ���� ���� ����\HDU
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Macroeconomic Implications
Decline in Labor Share
µit = θVitPitQit
PVit Vit
V=L⇒ wtLitSit
=θLitµit
.54
.56
.58
.6
.62
Labo
r sha
re (K
N)
.6
.7
.8
.9
1
Mar
kup
(Inve
rse)
1980 1990 2000 2010
Markup (Inverse)Labor share (KN)
For same reason: decline in Capital Share
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Summary of Facts
1. Increase in Markup since 1980: + 0.40 / 0.30
2. Mostly within industry (in all; no particular industries)
3. Only in the upper half of Markup distribution (especially at top)
4. Pure markup growth and reallocation across firms.
5. Total profits +7 ppt
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Implications
• Intuition model: 2 to 1 firm →• Total production declines and price increase,
• Demand for labor goes down, wages decrease,
• Average firm size increase.
• Labor market:
• Declining labor share
• Decline in (Low-skill) Wages and increasing inequality
• Decline in Labor Force Participation and Reallocation
• Decline in Output Growth
• Decline entry and investment?
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MLN USD question: Source?
• Heavily debated with and without facts: competition policy.
• My interpretation (so far):
1. Technological change:
• IT applications, rise fixed factors, automation, AI, etc.
2. Globalization: market size and cost reductions.
• Demand (expansion) and cost channels (GVC, outsourcing)
• Case-study: India (1985-1992) – De Loecker and Goldberg.
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Trade liberalization
• Natural experiments to simulate effects of opening up markets.
• Case of India: BOP crisis and IMF steps in: overnight tariff cuts.
• Conventional wisdom: pro-competitive effect reduces markups.
• We find increasing markups due to incomplete pass-through:
• Lower tariffs implies cost reductions,
• Not fully passed-on to final product price
• Results confirmed in other settings (e.g. Chinese import comp.).
• Globalization: allows top firms to expand more, while reducing cost.
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Concluding remarks
• Large secular change in firm performance with potential massive
implication for society at large.
• Global debate across academics, industry, and policy makers.
• Evidence-based debates are critical.