Working Paper: NBER ID: w24800
Authors: Chris Edmond; Virgiliu Midrigan; Daniel Yi Xu
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.
Keywords: No keywords provided
JEL Codes: D04; E02; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate markup (E10) | productivity (O49) |
| aggregate markup (E10) | welfare costs (I30) |
| markup dispersion (Y60) | misallocation of production factors (D24) |
| size-dependent taxes (H29) | markups (D43) |
| size-dependent taxes (H29) | misallocation (D61) |
| size-dependent taxes (H29) | productivity (O49) |