Working Paper: CEPR ID: DP9703
Authors: Bruno Cassiman; Stijn Vanormelingen
Abstract: While innovation is argued to create value, private incentives of firms to innovate are driven by what part of the value created firms can appropriate. In this paper we explore the relation between innovation and the markups a firm is able to extract after innovating. We estimate firm-specific price-cost margins from production data and find that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the firm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the firm's patenting and promotion behavior, the age of the firm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the firm's markup.
Keywords: markup; process innovation; product innovation; productivity
JEL Codes: D24; L11; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product innovations (O35) | firm markups (D43) |
| process innovations (O31) | firm markups (D43) |
| product innovations (O35) | demand (R22) |
| demand (R22) | firm markups (D43) |
| process innovations (O31) | cost reductions (D61) |
| cost reductions (D61) | firm markups (D43) |
| sustained product innovation (O36) | firm markups (D43) |
| firm characteristics (L20) | ability to appropriate returns from innovation (O36) |
| ability to appropriate returns from innovation (O36) | firm markups (D43) |