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Markups, Consumption and Market Concentration
Friday, Jan. 4, 2019
8:00 AM - 10:00 AM
Society for Economic Dynamics
Markups across Space and Time
In this paper, we provide direct evidence on the behavior of markups in the retail sector across space and time. Markups are measured using gross margins. We consider three levels of aggregation: the retail sector as a whole, firm-level data, and productlevel data. We find that: (1) markups are relatively stable over time and mildly procyclical; (2) there is large regional dispersion in markups; (3) there is a positive cross-sectional correlation between local income and local markups; and (4) differences in markups across regions are explained by differences in assortment, not by deviations from uniform pricing. We propose an endogenous assortment model that is consistent with these facts.
Quantifying the Effects of Market Power
We quantify the aggregate implications of the rise in market power. We provide a general equilibrium, oligopolistic model of firm dynamics, that can reproduce the key properties of firm dynamics via endogenous markup adjustment. A decrease in the number of firms – chosen to target the decline in dispersion of firm growth rates and the observed idiosyncratic shocks – explains recent secular trends in US data: reduced responsiveness of firm growth to shocks, lower rates of job creation and destruction, higher profitability driven by growth at upper percentiles, higher markups, and a lower labor share. Higher costs in the canonical model with adjustment frictions can match the same targets, but imply a counterfactually large decline in aggregate profits and do not match the evolution of markups.
The Rise in Household Spending Concentration
Household consumption bundles look increasingly different from each other. Using detailed scanner data from 2004-2015, we document that households are concentrating more and more spending on their preferred products. These products, however, are not "superstars" that are purchased by everyone. Rather, household purchases are increasingly idiosyncratic. As a result, aggregate product concentration has actually declined even as product concentration within households has risen. This trend is pervasive across geographic locations and product categories and even holds within demographic and income groups. The growth in household concentration is associated with households purchasing new and dropping old products and is most rapid in retail chains that introduce the most new products. Further, those households with more concentrated product spending pay more for the products they purchase. These patterns suggest firms are increasingly able to introduce customized products or that consumers can better find them, and carry implications for market power and consumer welfare.
Diverging Trends in National and Local Concentration
Using U.S. NETS data, we present evidence that the positive trend observed in national product- market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.
E3 - Prices, Business Fluctuations, and Cycles
D4 - Market Structure, Pricing, and Design