Working Paper: CEPR ID: DP13146
Authors: Jordi Jaumandreu; Shuheng Lin
Abstract: We study how firms’ innovations impact prices with endogenous productivity and markup, under imperfect competition and dynamic pricing. Absent innovation, productivity plus markup changes curb price growth to half of variable inputs cost growth. Innovation’s additional impact on costs is negatively correlated with markup changes. We detect two prevalent strategies. When marginal cost goes down, firms cash-in innovation by increasing the markups to enlarge profits. When marginal cost goes up, firms practice countervailing pricing by decreasing markups. With no innovation aggregate manufacturing price growth had multiplied by 1.4, but innovation without cash-in strategies had multiplied it by 0.8.
Keywords: price indices; marginal cost; markup; innovation
JEL Codes: D43; L11; L16; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| marginal costs decrease due to process innovations (O31) | markups increase (D43) |
| marginal costs increase (D40) | markups decrease (D43) |
| innovation (O35) | aggregate manufacturing price growth (C43) |
| innovation without cash-in strategies (O36) | aggregate manufacturing price growth (C43) |
| productivity improvements associated with innovations (O49) | moderation of aggregate price increases (E64) |