(see table A1.2 in annex 1)—is almost 40 percent.<sup>21</sup> It is worth highlighting, however, that these top decile firms also operate in some knowledge-intensive services sectors, though the probability is much smaller: 3.87 percent for computer programming and 2.68 percent for security and investigating activities.<sup>22</sup>

**When taken together, these results suggest that the small group of firms leading the overall increase in markups in Romania does not seem to follow the typical superstar firms’ profile** . As discussed by Van Reenen (2018) and Autor et al. (2017), superstar firms— typically with higher markups, larger, and more productive – would be rewarded with larger market shares due to their innovative nature. This hypothesis does not seem to be supported by data in Romania. As results showed, the group of firms who are driving the aggregate rise in markups—the top decile firms of the markup distribution—are typically smaller, less productive, less likely to invest in intangible assets, and are mostly active in services sectors where use and diffusion of knowledge is less important. This may suggest that the increase in markups in Romania might reflect a less competition-intensive environment rather than changes in the nature of competition, where superstar firms would be rewarded with greater market share because they are more efficient and innovative.

**Table 4. Probability of a top decile firm (in the markup distribution) being in the following sectors**

|**2-digit sector**|**Probability**|
|---|---|
|**Wholesale trade**|24.36|
|**Retail trade**|14.77|
|**Computer programming**|3.87|
|**Manufacturing of wearing apparel**|3.21|
|**Real estate activities**|3.14|
|**Security and investigation activities**|2.68|

_Source:_ World Bank staff calculations based on SBS data set.

_Note:_ The table shows only sectors for which the probability of a firm being in the top decile of markup distribution is higher than the sector’s overall frequency ratio.

- 4.2. HOW HAVE FIRM DYNAMICS INFLUENCED AGGREGATE MARKUP PERFORMANCE? ARE THERE SIGNS OF MARKET POWER CONSOLIDATION AMONG INCUMBENT FIRMS?

**To indirectly assess whether the rise in markups is associated with weakening competition, the analysis decomposes the evolution of aggregate markups into that of incumbents and of net entry of firms.** To do so, the Melitz and Polanec (2015) decomposition technique is applied to the aggregate markup changes between 2008 and 2017. This approach follows two steps. First, the aggregate (ln) markup ( _μ_ ) at year _t_ is defined as

> 21 Under the NACE 2-digit wholesale trade sector, the group of top decile firms are overrepresented in the following NACE 4-digit sectors: sector 4690–Non-specialized wholesale trade; sector 4673–Wholesale of wood, construction materials, and sanitary equipment; sector 4621–Wholesale of grain, unmanufactured tobacco, seeds, and animal feeds; sector 4646–Wholesale of pharmaceutical goods; sector 4675–Wholesale of chemical products; and sector 4631–Wholesale of fruit and vegetables. Under the NACE 2-digit retail services sector, the sample of top decile firms are overrepresented in the following NACE 4-digit sectors: sector 4711–Retail sale in nonspecialized stores with food, beverages or tobacco predominating; and sector 4730—Retail sale of automotive fuel in specialized stores.

> 22 The same analysis is applied for ownership structure, again controlling for overrepresentation. Results show that the sample of top decile firms are overrepresented in the fully foreign-owned ownership category.

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