How Costly Are Markups?
Chris Edmond, Virgiliu Midrigan, Daniel Yi Xu · National Bureau of Economic Research · 2018
We study the welfare costs of markups in a dynamic model with heterogeneous firms and endogenously variable markups.We find that the welfare costs of markups are large.We decompose the costs of markups into three channels: (i) an aggregate markup that acts like a uniform output tax, (ii) misallocation of factors of production, and (iii) an inefficiently low rate of entry.We find that the aggregate markup accounts for about two-thirds of the costs, misallocation accounts for about one-third, and the costs due to inefficient entry are negligible.We evaluate simple policies aimed at reducing the costs of markups.Subsidizing entry is not an effective tool in our model: while more competition reduces individual firms' markups it also reallocates market shares towards larger firms and the net effect is that the aggregate markup hardly changes.Size-dependent policies aimed at reducing concentration can reduce the aggregate markup but have the side effect of greatly increasing misallocation and reducing aggregate productivity.