Do Increasing Markups Matter? Lessons from Empirical Industrial Organization

Abstract

any economists and policymakers are expressing concern over the possibility of increasing monopoly power in the US and the world economy. There have been decades of research in industrial organization devoted to understanding how one can (and cannot) reliably learn about the causes and consequences of market power and markups-that is, a positive difference between price and marginal cost. Starting about 30 years ago (Bresnahan 1989), the field of industrial organization adopted methods for understanding firm conduct and markets on the basis of the relevant economic primitives: demand, cost, and pricing conduct. Thus, under the assumptions that firms maximize profits and have to cover their total costs, the equilibrium price (and other outcomes, such as product choice, location, quality, and innovation) will be determined by demand, marginal costs, and fixed (possibly sunk) costs, along with the conditions of competition that shape pricing behavior. These conditions are modeled using modern game theory to incorporate imperfect competition, product differentiation, multiproduct firms, and firm entry, as well as a host of industry-specific institutions.

Markup Dispersion and Firm Entry: Evidence from Ethiopia*

“…Some markets can be characterized by the presence of a small number of firms that keep their markups high. Following the existing literature, this is likely to happen because of the presence of (usually large) firms that manage better quality inputs while facing lower elastic demand (Atkin et al ., 2015; Edmond et al ., 2018), and that establish high entry barriers (Berry, Gaynor and Morton, 2019). The presence of market leaders can, therefore, inhibit entry decisions in their specific market, even if expected profits are high.…”

Monopsony in Spatial Equilibrium

“…The estimated negative partial correlation between employment concentration and wages is consistent with local monopsony, but does not confirm that this is the underlying mechanism at work. Berry et al (2019) reviews the potential problems in applying the structure-conduct-performance paradigm from the traditional industrial organization literature. The authors state that "… there are multiple causal paths that can explain a given correlation between concentration and other market outcomes" (page 46).…”

Multimarket Contact in the Hospital Industry

“…For the descriptive statistics here I utilize the Dartmouth Atlas' hospital referral region (HRR), which splits the United States into 306 distinct areas. 5 The data sources used to generate the statistics shown here are described in the online Appendix. Importantly, the data has comprehensive hospital ownership information that I compiled using a combination of (i) the American Hospital Association (AHA) Annual Survey of Hospitals, (ii) the healthcare M&A market intelligence firm Irving Levin's Hospital Acquisition Report, and (iii) archived news stories and hospital websites.…”