Using a unique firm-level dataset, where the mother firm and its subsidiaries can be identified, this paper documents that the average markup for firms in business groups is larger and increasing relative to the markup of firms that operate as single entities. Theory predicts that firms in business groups should have higher markups than firms that operate individually because firms in business groups can take advantage of cost complementarities and productivity gains within the group and thus face lower marginal costs. An instrumental variable regression with firm-level shift-share instruments for changes in imported inputs show that firms in groups increase their markup by 6 percent when the share of their imported inputs rise by one percent. According to the estimates and aggregate data trends, the cost complementarity channel has the potential to explain the aggregate markup growth and the difference in markup growth between the two types of firms observed in the data.
This paper examines how changes in product market concentration, specifically firm exit, affect prices. I develop a model where firms have variable markups to show that the remaining firms increase their markups and prices after their competitors' exit. The model predictions are tested using micro-data on Swedish firms. I use the exposure of firms to a bank, which was severely affected by the financial crisis abroad, as an instrument to identify the causal relationship between firm exit and prices. I find that the remaining firms increase their prices by 0.3 percent when firms with a combined market share of one percent exit.
Firms relying on working capital raise prices following monetary tightening, and this paper demonstrates that the working capital channel plays a key role in partial and general equilibrium inflation dynamics. The working capital channel arises from firms’ need to pre-fund inputs, determined by their exposure (working capital shares) and price elasticity (working capital sensitivity) to interest rate changes. Using detailed firm-product-level price data, the analysis shows that the average firm holds working capital equal to 16% of sales. For a firm with this average share, a one percentage point policy rate hike leads to a 0.48–2.56% price increase over a 3–33 month horizon.
with Sneha Agrawal and Abhishek Gaurav
In this paper, we study a new channel to explain firms' price setting behavior. We propose that uncertainty about factor prices has a positive effect on markups. We show theoretically that firms with higher shares of inputs with volatile prices set higher markups. We use the Bartik shift-share approach to empirically test whether firms which use more oil relative to other inputs set higher markups when oil prices are more volatile. Our estimates imply that a one standard deviation increase in oil price volatility leads to a 0.38 percent increase in the markup of firms with average oil exposure.