Abstract
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 three-quarters of the costs, misallocation accounts for about one-quarter, 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.
Presenter
Professor Chris Edmond, University of Melbourne
About School Seminar Series
The School of Economics General Seminar Series is held on Fridays. These are in-person and presented by a range of guest researchers from around Australia and internationally.