CHAPTER 6. MARKUPS FOR PRODUCT PRICE DETERMINATION

TABLE OF CONTENTS

6.1 INTRODUCTION ........................................................................................................... 6-1

6.1.1 Distribution Channels...................................................................................................... 6-1

6.1.2 Markup Calculation Procedure ........................................................................................ 6-1

6.2 MANUFACTURER MARKUP ...................................................................................... 6-2

6.3 RETAILER MARKUP .................................................................................................... 6-3

6.3.1 Approach for Retailer Markups....................................................................................... 6-3

6.3.1.1 Baseline Retailer Markup .............................................................................. 6-3

6.3.1.2 Incremental Retailer Markup ......................................................................... 6-4

6.4 SALES TAXES ............................................................................................................... 6-7

6.5 SUMMARY OF MARKUPS .......................................................................................... 6-8

LIST OF TABLES

Table 6.2-1 Manufacturer Markups by Product Class ............................................................ 6-2

Table 6.3-1 Data for Baseline Markup Calculation: Electronics and Appliance Stores 

(2007)................................................................................................................... 6-4

Table 6.3-2 Data for Incremental Markup Calculation: Electronics and Appliance 

Stores (2007)........................................................................................................ 6-5

Table 6.3-3 Electronics and Appliance Stores, Concentration by Four Large Firms ............. 6-7

Table 6.4-1 Average Sales Tax Rates by Census Division and Large State ........................... 6-7

Table 6.5-1 Summary of Markups for Cooled Cabinets......................................................... 6-8

Table 6.5-2 Summary of Markups for Non-Compressor Refrigerators.................................. 6-8

Table 6.5-3 Summary of Markups for Ice Makers.................................................................. 6-8

Table 6.5-4 Summary of Markups for Hybrid Products ......................................................... 6-9

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CHAPTER 6. MARKUPS FOR PRODUCT PRICE DETERMINATION

6.1 INTRODUCTION

To carry out its analyses, the U.S. Department of Energy (DOE) needed to determine the 

cost to the consumer of baseline products and the cost of more-efficient units. As discussed in 

chapter 8, DOE developed retail prices for baseline products mainly using online survey data. 

For products with higher-than-baseline efficiency, DOE estimated the consumer prices by 

applying appropriate markups to the incremental manufacturing costs estimated in the 

engineering analysis.

6.1.1 Distribution Channels

The appropriate markups for determining consumer equipment prices depend on the type 

of distribution channels through which products move from manufacturers to purchasers. At each 

point in the distribution channel, companies mark up the price of the equipment to cover their 

business costs and profit margin.

Data from the Association of Home Appliance Manufacturers (AHAM)1 indicate that an 

overwhelming majority of residential appliances are sold through retail outlets. Because DOE is 

not aware of any other distribution channel that plays a significant role for refrigeration products, 

DOE assumed that all of the miscellaneous refrigeration products are purchased by consumers 

from retail outlets. 

6.1.2 Markup Calculation Procedure

As just discussed, at each point in the distribution channel, companies mark up the price 

of the equipment to cover their business costs and profit margin. In financial statements, gross 

margin (GM) is the difference between the company revenue and the company cost of sales or 

cost of goods sold (CGS). The GM includes the expenses of companies in the distribution 

channel—including overhead costs (sales, general, and administration); research and 

development (R&D) and interest expenses; depreciation; and taxes—and company profits. To 

cover costs and to contribute positively to company cash flow, the price of products must include 

a markup. The markup commanded by a particular product depends on company expenses

associated with the product and the degree of market competition. In developing markups for 

manufacturers and retailers, DOE obtained data about the revenue, CGS, and expenses of firms 

that produce and sell the products of interest.

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6.2 MANUFACTURER MARKUP

DOE uses manufacturer markups to transform a manufacturer’s production costs into a 

manufacturer selling price (MSP). DOE used CGS and GM to calculate the manufacturer markup 

(MUMFG) with the following equation:

MFG

MFG MFG

MFG CGS

CGS GM

MU

+ =

where:

MUMFG = manufacturer markup,

CGSMFG = manufacturer’s cost of goods sold or manufacturer production cost (MPC), 

and

GMMFG = manufacturer’s gross margin.

DOE developed the average manufacturer markup for each product class by 

examining the annual U.S. Security and Exchange Commission (SEC) 10-K reports from 

publicly owned manufacturing companies primarily engaged in producing miscellaneous 

refrigeration products. Because these companies are typically diversified, producing a range of 

different appliances, DOE assumed that an industry average markup was representative for the 

manufacturers of miscellaneous refrigeration products. Table 6.2-1 presents manufacturer 

markups for all product classes considered in this analysis.

Table 6.2-1 Manufacturer Markups by Product Class

Product class Product description Baseline 

Markup

Cooled cabinets

CC-1 Vapor compression cooled cabinet 1.26

CC-2 Thermoelectric cooled cabinet 1.22

Cooled cabinet average (weighted by market share) 1.23

Non-Compressor Refrigerators

NCR-1 Thermoelectric refrigerator 1.22

NCR-2 Absorption refrigerator 

Ice makers

IM-P Portable ice maker 1.23

IM-C Non-portable ice maker, cooled-storage

IM-U Non-portable ice maker, uncooled-storage

Hybrid products

H-3A-BI Standard-size, built-in hybrid all-refrigerators with automatic 

defrost

1.26

H-9I-BI Standard-size, built-in upright hybrid freezers with automatic 

ice maker

H-11A Compact hybrid all-refrigerators with manual defrost

H-13A Compact hybrid all-refrigerators with automatic defrost

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6.3 RETAILER MARKUP 

6.3.1 Approach for Retailer Markups

DOE based the retailer markups for miscellaneous refrigeration products on financial 

data for electronics and appliance stores from the 2007 U.S. Census Annual Retail Trade Survey

(ARTS), which is the most recent survey available with detailed operating expenses for this 

particular sector.

2 DOE organized the financial data into statements that break down cost 

components incurred by firms in this category. DOE assumes that the income statements

faithfully represent the various average costs incurred by firms selling home appliances. 

Although electronics and appliance stores handle multiple commodity lines, the data provide the 

most accurate available indication of expenses for selling home appliances.

The 2007 ARTS data provided for electronics and appliance stores contain total sales and 

detailed operating expenses. In order to construct a complete data set to estimate markups, DOE 

needed to estimate CGS and GM. The most recent 2011 ARTS publishes a separate historical 

sales and GM of Household Appliance Stores from 1993 to 2011. DOE then took the GM as 

percent of sale reported for 2007 and combined this with 2007 ARTS data to construct a 

complete income statement for electronics and appliance stores to estimate both baseline and 

incremental markups. 

6.3.1.1 Baseline Retailer Markupa

The baseline markup relates the manufacturer sales price of baseline products to the 

retailer sales price. DOE considers baseline models to be equipment sold under existing market 

conditions (i.e., without new energy efficiency standards). DOE calculated the baseline markup 

(MUBASE) for retailers as an average markup using the following equation:

RTL

RTL RTL

BASE CGS

CGS GM MU + =

where:

MUBASE = baseline retailer markup,

CGSRTL = retailer’s cost of goods sold,

GMRTL = retailer’s gross margin, 

Table 6.3-1 shows the calculation of the baseline retailer markup.

a As described in section 6.1, the baseline retail markup was not used in the analysis for 

refrigeration products. DOE presents the derivation of this markup so it can be contrasted with 

the incremental retail markup.

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Table 6.3-1 Data for Baseline Markup Calculation: Electronics and Appliance Stores 

(2007)

Kind of business item

Amount 

($1,000,000)

Sales $110.673

Cost of Goods Sold (CGS) $81.234

Gross Margin (GM) $29.439

Baseline Markup = (CGS+GM)/CGS 1.36

Source: U.S. Census, 2007 Annual Retail Trade Survey

6.3.1.2 Incremental Retailer Markup

Incremental markups are coefficients that relate the change in the manufacturer sales 

price of higher-efficiency models to the change in the retailer sales price. DOE considers higherefficiency models to be equipment sold under market conditions with new efficiency standards. 

The incremental markup reflects a situation in which the retailer faces an increase in CGS for a 

particular product due to new or amended standards.

Unfortunately, DOE was able to find limited empirical evidence regarding appliance 

retailer markup practices associated with increases in a product’s cost (due to increased 

efficiency or other factors). DOE understands that real-world markup practices will vary 

depending on the market conditions faced by retailers, on the magnitude of the change in CGS 

associated with an efficiency increase, and on any associated changes in retail costs. Pricing in 

retail stores may also involve rules of thumb that are difficult to know and to incorporate into 

DOE’s analysis.

Given the uncertainty about actual markup practices in appliance retailing, DOE uses an 

approach that reflects the following key concepts:

1. Changes in the efficiency of the goods sold are not expected to increase economic profits.

Thus, DOE calculates markups/gross margins to allow cost recovery for retail companies 

in the distribution chain (including changes in the cost of capital) without changes in 

company profits. 

2. Efficiency improvements impact some distribution costs but not others. DOE sets

markups and retail prices to cover only the distribution costs that are expected to change 

with efficiency and does not adjust them for distribution costs that are not expected to 

change with efficiency.

The incremental markup approach is described in more detail in Dale et al. (2004).3

To estimate incremental retailer markups, DOE divides retailers’ operating expenses into 

two categories: (1) those that do not change when CGS increases due to amended efficiency 

standards (“fixed”), and (2) those that increase proportionately with CGS (“variable”). DOE

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defines labor and occupancy expenses as fixed costs, because these costs are not likely to 

increase as a result of a rise in CGS due to amended efficiency standards. All other expenses, as 

well as the net profit, are assumed to vary in proportion to CGS. Although it is possible that 

some of the other expenses may not scale with CGS, DOE is inclined to take a more conservative 

position and include these as variable costs. (Note: Under DOE’s approach, a high fixed cost 

component yields a low incremental markup.)

DOE calculated the incremental markup (MUINCR) for retailers using the following 

equation:

RTL

RTL RTL

INCR CGS

CGS VC MU + =

where:

MUINCR = incremental retailer markup,

CGSRTL = retailer’s cost of goods sold, and

VCRTL = retailer’s variable costs.

Table 6.3-2 shows the breakdown of operating expenses using the 2007 ARTS data. The 

incremental markup is calculated as 1.11.

Table 6.3-2 Data for Incremental Markup Calculation: Electronics and Appliance Stores 

(2007)

Amount 

($1,000,000)

Sales $110,673

Cost of Goods Sold (CGS) $81,234

Gross Margin (GM) $29,439

Labor & Occupancy Expenses (“Fixed”)

Annual payroll $11,714

employer costs for fringe benefit $1,829

Contract labor costs including temporary help $154

Purchased utilities, total $623

Cost of purchased repair and maintenance services $369

Cost of purchased professional and technical services $1,164

Purchased communication services $396

Lease and rental payments $3,576

Taxes and license fees (mostly income taxes) $619

Subtotal: $20,444

Other Operating Expenses & Profit (“Variable”)

Expensed equipment $114

Cost of purchased packaging and containers $68

Other materials and supplies not for resale $502

Cost of purchased transportation, shipping and warehousing services $606

Cost of purchased advertising and promotional services $2,625

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Cost of purchased software $159

Cost of data processing and other purchased computer services, except communications + 

Commissions paid $368

Depreciation and amortization charges $1,525

Other operating expenses $2,070

Net profit before tax (Operating profit) $958

Subtotal: $8,995

Incremental Markup = (CGS+Total Other Operating Expenses and Profit)/CGS 1.11

Source: U.S. Census, 2007 Annual Retail Trade Survey (Sales), and 2011 Annual Retail Trade Survey (GM and 

CGS)

By dividing expenses into fixed and variable components, the incremental markup 

approach envisions that retailers cover costs without changing profits. Although retailers may be 

able to reap higher profits for a time, DOE’s approach assumes that competition in the appliance 

retail market, combined with relatively inelastic demand (i.e., the demand is not expected to 

decrease significantly with a relatively small increase in price), will tend to pressure retail 

margins back down. 

To measure the degree of competition in appliance retailing, DOE estimated the four firm 

concentration ratio (FFCR) of major appliance sales in three retail channels: Electronics and 

Appliance Stores, Building and Material and Supplies Dealers, and General Merchandise Stores.

The FFCR represents the market share of the four largest firms in the relevant sector. Generally, 

an FFCR of less than 40% indicates that the sector is not concentrated and an FFCR of more than 

70% indicates that a sector is highly concentrated.b

,

c

The FFCR of sub-sector appliance sales within each channel is equal to the sector FFCR 

times the percent of total sales within each channel accounted for by major appliances. As shown 

in Table 6.3-3, the results indicate that appliance sales in Electronics and Appliance Stores, 

Household Appliance Stores, Building Material Supplies Dealers, and General Merchandise 

Stores have a FFCR well under the 40% threshold. Moreover, the Electronics and Appliance 

Stores sector includes “Household Appliance Stores” as a subsector. Because there are many 

stores in this subsector, it has a FFCR of only 21.3%.

b University of Maryland University College

http://info.umuc.edu/mba/public/AMBA607/IndustryStructure.html

c Horizontal Merger Guidelines by U.S. Department of Justice and Federal Trade Commission

http://www.justice.gov/atr/hmerger/11247.pdf

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Table 6.3-3 Electronics and Appliance Stores, Concentration by Four Large Firms

Sector

Four Firm 

Concentration Ratio

(Percent of Sector Sales)

Percent of Sales

Accounted for by 

Major Appliances

Four Firm 

Concentration Ratio

(Percent of Major 

Appliance Sales)

Electronics and Appliance 

Stores 46.3 42.1 19.5

Household Appliance 

Stores subsector 21.3 37.1 7.9

Building Material and 

Supplies Dealers 45.9 17.0 7.8

General Merchandise 

Stores 73.2 31.6 23.1

Source: U.S. Economic Census, Establishment and Firm Size: (Including Legal Form of Organization), 2007.

*Note: The assumption used here is that major appliance sales are uniformly distributed within all firms in each sector. 

6.4 SALES TAXES

The sales tax represents state and local sales taxes that are applied to the consumer 

equipment price. The sales tax is a multiplicative factor that increases the consumer equipment 

price. DOE derived state and local taxes from data provided by the Sales Tax Clearinghouse.

4

DOE derived population-weighted average tax values for each Census division and large state, as 

shown in Table 6.4-1.

Table 6.4-1 Average Sales Tax Rates by Census Division and Large State

Census 

Division/State

Population Tax Rate (2013)

%

New England 14,492,360 5.64

Middle Atlantic 21,564,041 6.62

East North Central 46,519,084 6.84

West North Central 20,639,751 7.02

South Atlantic 41,167,090 6.44

East South Central 18,553,961 8.01

West South Central 11,304,323 8.67

Mountain 22,373,411 6.46

Pacific 12,799,425 5.30

New York 19,465,197 8.40

California 37,691,912 8.45

Texas 25,674,681 7.95

Florida 19,057,542 6.65

Population weighted average 7.146

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6.5 SUMMARY OF MARKUPS

Table 6.5-1 to Table 6.5-4 summarize the national average markups at each stage in the 

distribution channel and the average sales tax for each product class.

Table 6.5-1 Summary of Markups for Cooled Cabinets

Markup Baseline

Markup

Incremental

Markup

Manufacturer Vapor compression cooled cabinet (CC-1) 1.26

Thermoelectric cooled cabinet (CC-2) 1.22

Retailer 1.36 1.11

Sales Tax 1.071

Table 6.5-2 Summary of Markups for Non-Compressor Refrigerators

Markup Baseline

Markup

Incremental

Markup

Manufacturer Thermoelectric refrigerator (NCR-1) 1.22

Absorption refrigerator (NCR-2) 1.22

Retailer 1.36 1.11

Sales Tax 1.071

Table 6.5-3 Summary of Markups for Ice Makers

Markup Baseline

Markup

Incremental

Markup

Manufacturer

Portable ice maker (IM-P) 1.23

Non-portable ice maker, cooled-storage

(IM-C) 1.23

Non-portable ice maker, uncooled-storage

(IM-U) 1.23

Retailer 1.36 1.11

Sales Tax 1.071

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Table 6.5-4 Summary of Markups for Hybrid Products

Markup Baseline

Markup

Incremental

Markup

Manufacturer

Standard-sized, built-in hybrid allrefrigerators with automatic defrost (H-3ABI)

1.26

Standard-sized, built-in upright hybrid 

freezers with automatic ice maker (H-9I-BI) 1.26

Compact hybrid all-refrigerators with 

manual defrost (H-11A) 1.26

Compact hybrid all-refrigerators with 

automatic defrost (H-13A) 1.26

Retailer 1.36 1.11

Sales Tax 1.071

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REFERENCES

1 Association of Home Appliance Manufacturers. AHAM 2003 Fact Book, 2003. Washington, 

DC. p. 25.

2 U.S. Census Bureau. 2007 Annual Retail Trade Survey, Electronics and Appliance Stores, 

2007. Washington, DC. < http://www.census.gov/retail/arts/historic_releases.html >

3 Dale, Larry et al., “An Analysis of Price Determination and Markups in the Air-Conditioning 

and Heating Equipment Industry”, LBNL-52791, January 2004.

4 Sales Tax Clearinghouse, Inc. State sales tax rates along with combined average city and 

county rates. Last access in July 2013 <http://thestc.com/STrates.stm>

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