Abstract:
I study how ownership consolidation affects market power on both factor and goods markets, and productive efficiency. I develop a model to separately identify markups, markdowns and productivity using production and cost data. I use it to examine the effects of a large-scale consolidation policy in the Chinese cigarette manufacturing industry. Exploiting size thresholds in the policy, I find that it increased leaf price markdowns by a third, but did not increase markups or productivity. As a result, income inequality between tobacco farmers and manufacturing workers increased by twice as much as it would have without the consolidation.

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