TY  - JOUR
AU  - Edmond, Chris
AU  - Midrigan, Virgiliu
AU  - Xu, Daniel Yi
TI  - How Costly Are Markups?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 24800
PY  - 2018
Y2  - July 2018
DO  - 10.3386/w24800
UR  - http://www.nber.org/papers/w24800
L1  - http://www.nber.org/papers/w24800.pdf
N1  - Author contact info:
Chris Edmond
Department of Economics
University of Melbourne
Parkville VIC 3010
AUSTRALIA
Tel: +61-3-8344-9733
Fax: +61-3-8344-6899
E-Mail: chris.edmond@gmail.com

Virgiliu Midrigan
Department of Economics
New York University
19 W. 4th St.
New York, NY 10012
Tel: 212/992-8081
Fax: 212/995-4186
E-Mail: virgiliu.midrigan@nyu.edu

Daniel Xu
Department of Economics
Duke University
213 Social Science Bldg
419 Chapel Drive
Box 90097
Durham, NC 27708-0097
Tel: 919-660-1824
E-Mail: daniel.xu@duke.edu
AB  - 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.
ER  -