Economic analysis of market power
Authors:   , Fernandes Pedro Soares Ana Cristina 
Published: August 2023

Using microeconomic tools, I discuss empirically economic factors that could play a role in generating markup heterogeneity across firms and sectors.
In Chapter 2, we estimate markups following De Loecker and Warzynski (2012a) and discuss the role of financial frictions on markup adjustments at the firm level. To estimate financial frictions that are exogenous from the perspective of the firm following Amiti and Weinstein (2018) and Degryse, De Jonghe, Jakovljevic, Mulier and Schepens (2019). We find that firms that are more exposed to liquidity risks tend to raise markups in response to negative bank-loan supply shocks, while less exposed firms generally reduce them. We show that our findings are mostly consistent with models featuring a sticky customer base, where financially constrained firms have an incentive to raise markups to sustain liquidity. We find also that financial frictions add a countercyclical dimension in aggregate markup dynamics as predicted by this theoretical framework.
In Chapter 3, we jointly estimate markups and workers' bargaining power across sectors by incorporating a Nash bargaining model between workers and firms in a production function following Roeger (1995), Crépon, Desplatz, Mairesse and Desplatz (2005), Dobbelaere (2004), Abraham, Konings and Vanormelingen (2009) and Dobbelaere and Mairesse (2013). Services are classified between tradable and non-tradable sectors according to their exposure to international trade measured as export-to-revenue ratios. Our findings suggest that around 1 in 5 service industries are in fact considered tradable. We find that exposure to international trade is likely to play a disciplining force in markups according to the pro-competitive models of international trade particularly in more exposed sectors. However, we find no effect of this disciplining effect on workers’ bargaining power when jointly considered.
In Chapter 4, we document a fragmentation of the Single Market highlighting the role of potential barriers to trade, regulatory and institutional obstacles that prevent a reallocation of resources across firms and countries, equalizing prices and markups. Using firm-level data, we estimate markups and also relax the assumption of perfect competition in the labour market by incorporating a Nash bargaining negotiation between firms and workers in a production function following Roeger (1995), Crépon et al. (2005), Dobbelaere (2004), Abraham et al. (2009) and Dobbelaere and Mairesse (2013). Our findings suggest that perfect competition in both product and labour markets is widely rejected across sectors and that there are sizeable differences in the price cost margin and the workers’ bargaining power both within and across countries. In addition, we show that product and labour market imperfections are strongly positively correlated and that the market power of the firm is substantially underestimated by dismissing the degree of rent sharing with their workers.
In Chapter 5 we empirically estimate the role of innovation in driving prices, markups, and firm efficiency and discuss to what extent can drive markup heterogeneity within an industry and act as a source of misallocation. In this Chapter, we estimate markups based on the main product of the firm, and back out marginal given that output prices are observed following the work of De Loecker, Goldberg, Khandelwal and Pavcnik (2016) based on a production estimation where R&D can potentially increase productivity (Doraszelski and Jaumandreu (2013). In addition, I compute TFPQ following the work of Foster, Haltiwanger and Syverson (2008), Bircan (2019) and De Loecker et al. (2016). We find that markups tend to rise persistently when firms innovate reflecting mainly a movement in output prices which drives up markup heterogeneity despite the pro-competitive effect of firm entry. This result is consistent with an increase in aggregate misallocation associated with this rise in markup dispersion.