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.
The New Keynesian model augmented with the working capital channel predicts that a rise in the policy rate causes firms that use more working capital to increase their prices more and that the pass-through of policy rate changes to prices is gradual because of price rigidity. Using firm-level data, I show that a one percentage unit increase in the policy rate leads to a one percent increase in the firm's price via the working capital channel and that the pass-through takes about 4 months, consistent with standard assumptions in DSGE models.
Markups as a Hedge for Input Price Uncertainty: Evidence from Sweden [paper upon request]
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.