Presented By: Department of Economics
Macroeconomics: How Costly Are Markups?
Virgiliu Midrigan, NYU
![Economics Economics](https://events.umich.edu/media/cache/event_large/media/attachments/2018/08/event_54218_original.png)
Abstract
We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenously variable markups. We find that the welfare costs of markups are large. We decompose the costs of markups into three channels: (i) an aggregate markup that acts like a uniform output tax, (ii) misallocation of factors of production, and (iii) an inefficiently low rate of entry. We find that the aggregate markup accounts for about two-thirds of the costs, misallocation accounts for about one-third, and the costs due to inefficient entry are negligible. We evaluate simple policies aimed at reducing the costs of markups. Subsidizing entry is not an effective tool in our model: while more competition reduces individual firms’ markups it also reallocates market shares towards larger firms and the net effect is that the aggregate markup hardly changes. Size-dependent policies aimed at reducing concentration can reduce the aggregate markup but have the side-effect of greatly increasing misallocation and reducing aggregate productivity.
http://www.virgiliumidrigan.com/uploads/1/3/9/8/13982648/how-costly-markups-09-29-18.pdf
We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenously variable markups. We find that the welfare costs of markups are large. We decompose the costs of markups into three channels: (i) an aggregate markup that acts like a uniform output tax, (ii) misallocation of factors of production, and (iii) an inefficiently low rate of entry. We find that the aggregate markup accounts for about two-thirds of the costs, misallocation accounts for about one-third, and the costs due to inefficient entry are negligible. We evaluate simple policies aimed at reducing the costs of markups. Subsidizing entry is not an effective tool in our model: while more competition reduces individual firms’ markups it also reallocates market shares towards larger firms and the net effect is that the aggregate markup hardly changes. Size-dependent policies aimed at reducing concentration can reduce the aggregate markup but have the side-effect of greatly increasing misallocation and reducing aggregate productivity.
http://www.virgiliumidrigan.com/uploads/1/3/9/8/13982648/how-costly-markups-09-29-18.pdf
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