How Costly Are Markups?

We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenous markups. We provide aggregation results summarizing the macro implications of micro-level markup heterogeneity. We calibrate our model to US Census of Manufactures data and find that the costs of markups...

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Bibliographic Details
Published in:The Journal of political economy 2023-07, Vol.131 (7), p.1619-1675
Main Authors: Edmond, Chris, Midrigan, Virgiliu, Xu, Daniel Yi
Format: Article
Language:English
Subjects:
Censuses
Economic theory
Endogenous
Political economy
Production factors
Welfare
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Summary:We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenous markups. We provide aggregation results summarizing the macro implications of micro-level markup heterogeneity. We calibrate our model to US Census of Manufactures data and find that the costs of markups can be large. We decompose the costs into three channels: an aggregate markup that acts like a uniform output tax, misallocation of factors of production, and inefficient entry. We find that the aggregate-markup and misallocation channels account for most of the costs of markups and that the entry channel is much less important.
ISSN:0022-3808
1537-534X
DOI:10.1086/722986