A group of recent research studies have argued that "markups" are on the rise. As one of several prominent examples, a study by Jan De Loecker, Jan Eeckhout, and Gabriel Unger, called "The Rise of Market Power and the Macroeconomic Implications" presents calculations suggesting that the average markup for a US firm rose from 1.21 in 1980 to 1.61 in 2016 (here's a working paper version from Eeckhout's website dated November 22, 2018). The Summer 2019 issue of the Journal of Economic Perspectives discusses the strengths and weaknesses of this evidence in a three-paper symposium:"Are Price-Cost Markups Rising in the United States? A Discussion of the Evidence," by Susanto Basu "Macroeconomics and Market Power: Context, Implications, and Open Questions," by Chad Syverson "Do Increasing
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- "Are Price-Cost Markups Rising in the United States? A Discussion of the Evidence," by Susanto Basu
- "Macroeconomics and Market Power: Context, Implications, and Open Questions," by Chad Syverson
- "Do Increasing Markups Matter? Lessons from Empirical Industrial Organization," by Steven Berry, Martin Gaynor and Fiona Scott Morton
1) For economists, "markups" are not the same as profits. Profits happen when price is above the average cost of production. Markups are defined as a situation where the price is above the marginal cost of production. This definition is also why markups are so hard to measure. It's pretty straightforward to measure average cost: just take the total cost of production and divide by the quantity produced. But measuring marginal cost of production is hard, because it requires separating a firm's expenses into "fixed" and "variable" costs, which is a useful conceptual division for economists but not how firms divide up their costs for accounting purposes.
2) There are a number of economic situations where there can be persistent markups while profits remain at normal levels. As one example, Every intro textbook discusses "monopolistic competition," a situation in which firms in a market sell similar but differentiated products. Examples include clothing stores in the same shopping mall with different styles, gas stations with different locations, products sold with different money-back guarantees, and all the everyday products like dishwasher soap. The basic textbook explanation is that in a setting of monopolistic competition, firms will be able to set prices above marginal cost, charging more to consumers who desire the specific differentiated characteristics of that product. However, part of the definition of monopolistic competition is that other firms can easily enter the market and expand production. The result is a situation of positive markups (price higher than marginal cost) but only average profits.
3) Another example of positive markups arises in companies with high fixed costs and low marginal costs: as a simple example, think of a video game company where the cost of creating the game is high, but once the game is created, the marginal cost of providing the game to an additional user is near zero. It's quite possible for this kind of company to have a positive markup (price over marginal cost), but also to suffer losses (because price isn't enough above the markup to cover the firm's fixed costs).
4) Many big tech companies--Facebook, Amazon, Google, Apple, Microsoft, and others--have a number of products that share this property of high fixed costs and lower marginal costs. Thus, these companies are likely to have high mark-ups. Moreover, given their technology, size, and business, practices, it may be difficult for entrants to challenge these companies. As a result, companies like these may have an ability for a combination of sustained high markups and high profits over time. For example, in the study mentioned above by De Loecker, Eeckhout, and Unger, the overall rise in mark-ups not because of a rise in markups for the median company, but because of a very sharp rise in markups for a much smaller number of companies.
5) An emergence of high-markup, high-profit firms may be in some cases a positive step for productivity and wages. There is an emerging literature on what are sometimes called "superstar" firms (here's a recent working paper version of "The Fall of the Labor Share and the Rise of Superstar Firms," by David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen ). Imagine a company that makes large-scale investments in information technology, both for the logistics of running its operations and for quality control, and also in widespread use of far-flung supply chains. Based on these high fixed costs, such a company may be able to expand in the market, taking market share from smaller firms. But economists commonly hold that when a company succeed by offering the products that consumers desire at attractive prices, this is a good thing. Thus, antitrust authorities need to think carefully about whether companies with high markups are gaining high profits through pro-consumer fixed investments or by anti-consumer restraints on competitors.