The Rise of Market Power - DIW...MC i)With = 1:6 in 2016, implied pro t rate is ˇ= 1 1 1:61 =0:38!!...

The Rise of Market Power

Jan Eeckhout

UPF Barcelona and UCL

BCCP ConferenceJune 21, 2019

Facts about Market Power

Estimating markups

• Cost based method; publicly traded firms 1955–2016• From firm’s FOC for cost minimization and µ = PMC :

µit = θVit

PitQit

PVit VitV ∈ {Lab,Mat,Elec , ...}

• Individual Markup ⇒ distribution of markups• Average markup, weighted by mit (sales, costs, employment,...):

µt =∑i

mitµit

• Markup 6= Market Power: with fixed cost calculate profit rate

1. HeterogeneityNo Change... in median markup

1.1

1.2

1.3

1.4

1.5

1.6

1960 1970 1980 1990 2000 2010

1. HeterogeneityIncrease in Average Markup since 1980

1.1

1.2

1.3

1.4

1.5

1.6

1960 1970 1980 1990 2000 2010

AverageP50

1. HeterogeneityAll Action in Upper Half Distribution

1

1.5

2

2.5

1960 1970 1980 1990 2000 2010

AverageP90P75P50

1. HeterogeneityKernel Density 1980, 2016

0

.5

1

1.5

2

1 2 3

20161980

Facts

1. Heterogeneity: sharp rise for few firms; no rise for most

(Carlos Brito)

Reallocation of sales from low to high markup firms (2/3)

Technology Matters:

Fixed cost (SG&A) ↑Returns to Scale ↑

Magnitude of the Increase?

Weighting and Aggregation is crucial (+15-20 points)Profit rate (+7-8 ppts) 6= Markup (+30-40 points)

Facts

1. Heterogeneity: sharp rise for few firms; no rise for most (Carlos Brito)

Reallocation of sales from low to high markup firms (2/3)

Technology Matters:




2. ReallocationWeighting Matters: Input Weight

1.2

1.3

1.4

1.5

1.6

1960 1970 1980 1990 2000 2010

Sales Total cost

• See Grassi (2016) and Edmond, Midrigan and Xu (2019)

2. Reallocation

∆µt =∑i

mi,t−1∆µit︸︷︷︸∆ within

+∑i

µi,t−1∆mi,t︸︷︷︸∆ market share

+∑i

∆µi,t∆mi,t︸︷︷︸∆ cross-term

+∑

i∈Entry

µi,tmi,t −∑i∈Exit

µi,t−1mi,t−1︸︷︷︸net entry

1.20

1.30

1.40

1.50

1980 1990 2000 2010

Markup (benchmark)WithinReallocationNet Entry

See also Superstar Firms (Autor, Dorn, Katz, Patterson, Van Reenen (2018))

Facts


2. Reallocation of sales from low to high markup firms (2/3)

Technology Matters:




3. Technology MattersRise in Overhead (SG&A)

.12

.14

.16

.18

.2

.22

1960 1970 1980 1990 2000 2010

Facts



3. Technology Matters: Overhead cost (SG&A) ↑Magnitude of the Increase?


4. Magnitude of Increasea. Aggregation: Industry Averages: +20 points

1.1

1.2

1.3

1.4

1.5

1.6

1960 1970 1980 1990 2000 2010

Benchmark Aggregate MarkupAverages (By Industry, time-varying thetas)Averages (By Industry)Averages (Economy-wide)

• See also Hall (1988 and 2018)

4. Magnitude of Increaseb. Profit Rate: +7-8 ppt

0

.02

.04

.06

.08

.1

1960 1970 1980 1990 2000 2010

• Profits/Value Added: +15%

4. Magnitude of IncreaseProfit Rate vs Markup

• The profit rate:

πi =PiQi − C (Qi )

PiQi= 1− 1

µi

ACiMCi

⇒ With µ = 1.6 in 2016, implied profit rate is π = 1− 11.61 = 0.38!!

• This logic uses:1. Representative Firm Economy: but Aggregation (Jensen’s Inequality)2. Unchanged economies of scale (AC = MC ): but ACMC ↑ (Overhead ↑)

4. Magnitude of IncreaseProfit Rate vs Markup

0

.1

.2

.3

.4

1980 1990 2000 2010

Avg, No FCAggr, FCProfit Rate

Facts



3. Technology Matters: Overhead cost (SG&A) ↑4. Magnitude of the Increase?

a Weighting and Aggregation is crucialb Profit rate (+7-8 ppts) 6= Markup (+30-40 points)

∴ Only publicly traded firms (40% of GDP)

Robustness: US CensusesManufacturing

1.5

1.6

1.7

1.8

1.9

1972 1977 1982 1987 1992 1997 2002 2007 2012

1.5

2

2.5

3

1972 1977 1982 1987 1992 1997 2002 2007 2012

Mw90Mw75Mw50

Global Markup134 countries; 70,000 firms; 1980-2016

1.1

1.2

1.3

1.4

1.5

1.6

1980 1990 2000 2010

GLOBAL

Markup Continents

1

1.2

1.4

1.6

1.8

1

1.2

1.4

1.6

1.8

1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010

EUROPE NORTH AMERICA SOUTH AMERICA

ASIA OCEANIA AFRICA

Germany

1

1.1

1.2

1.3

1.4

1980 1990 2000 2010

GERMANY

Quantifying Market Power:

Causes and Consequences

Quantifying Market Power

Market Power in General Equilibrium• Causes: need both

1. Market Structure: ABInBev→ labor reallocation down

2. Technology: Amazon Paradox→ fixed cost and productivity dispersion ⇒ markup dispersion

⇒ Net effect: Welfare loss

• Consequences: Secular Trends in Macro1. Wage Stagnation: equilibrium effect (not monopsony)2. Labor Share decline: at firm level3. Decline in Business Dynamism: incomplete passthrough4. Reallocation of sales towards high markup, large superstar firms

Quantifying Market Power

Market Power in General Equilibrium• Causes: need both

1. Market Structure: ABInBev→ labor reallocation down

2. Technology: Amazon Paradox→ fixed cost and productivity dispersion ⇒ markup dispersion

⇒ Net effect: Welfare loss• Consequences: Secular Trends in Macro

1. Wage Stagnation: equilibrium effect (not monopsony)2. Labor Share decline: at firm level3. Decline in Business Dynamism: incomplete passthrough4. Reallocation of sales towards high markup, large superstar firms

The Rise of Market Power

Jan Eeckhout

UPF Barcelona and UCL

BCCP ConferenceJune 21, 2019

The Rise of Market Power - DIW...MC i)With = 1:6 in 2016, implied pro t rate is ˇ= 1 1 1:61 =0:38!!...

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