Are mark-ups rising?

In a new Stigler Center working paper, I) challenge this explanation by showing that public-firm market power has not substantially increased in recent decades. Using financial statement data from public firm filings and closely following De Loecker and Eeckhout (2017)’s methodology, I calculate markupsprices over marginal costs—for the universe of non-utility, non-financial US public firms. Aggregating these markup estimates to annual estimates, I find that public firm markups increased only modestly since the 1980s. Moreover, this increase is within historical variation—measured markups have increased from 1980-2010 as much as they have decreased from 1950-1980.

Why the disagreement? While De Loecker and Eeckhout (2017) use similar data sources and methods, I argue that they do not use the best accounting measure of variable cost.

Here is more from James Traina.  Via Harald Uhlig.

Comments

1980-2010. Let's see, what significant happened during the period of the study? Right, Trump went bankrupt. Several times. No markup there. Oh yea, inflation (a/k/a markups) all but disappeared, even though assets experienced significant rising (and falling) asset prices but that's not considered "inflation".

"Trump went bankrupt": did he? Firms Trump owned or Trump himself?

Should Googe, Amazon etc be viewed as unregulated utilities?

Why exclude financial firms? They have achieved the most growth since 1980.

Bonus trivia: in the wonderful, short "time capsule" book " Sailing Through China" by Paul Theroux (1982), the uncle of Greek-American actress' Jen Annison's ex, the author reports that a Wall Streeter told him that "US stocks are undervalued". Talk about a great call! Yet Theroux, like his many other predictions (including Deng's 'China will be a major power by 2000') dismisses, by his tone of writing, these predictions as laughable or trite. It's great to read these kind of books, in retrospect, to see what the authors got wrong or right (same with chess books annotating games pre-chess engine, i.e. done by humans and thus full of mistakes). Theroux also notes there are few birds or wild animals in China, as they are eaten (same as I've observed and said about the Philippines), that China was polluted even back then, and that US millionaires considered 25 million ($50M in today's money) as the minimum you need to be a comfortable millionaire (I agree) and further he noted the US millionaires read few books, like to discover things for themselves via travel, and banally keep score of how rich they are, often openly gossiping and signaling their wealth (I too come from a family whose net worth is in the 1%, minimum net worth US $10M).

Haven't finished reading the paper, but measuring the marginal costs or variable inputs of banks is not nearly as obvious as it is for normal firms, so it's not clear if we can compare bank markups to those of firms in a meaningful way (among other issues).

There is however a whole wealth of literature on competition and markups in the financial industry.

the standard argument should be that competition would drive markups down over time so if this type of aggregate study shows increases over a multi decade period that says something about the market structure in place and how well competition does what is claimed. While degree I suppose should matter and no mention of that is present here over a multi-decade period one would think we get out of short-run effects.

"This trend shows that firms have increasingly devoted more of their inputs toward marketing and management costs, the part of OPEX that isn’t measured in COGS. Hence, not only does COGS understate costs (and therefore overstate price-cost markups), but it does so increasingly over time."

So is it possible that industry concentration means that more revenues are captured by management? Could management be smart enough to extract monopoly profits from the firm, in the form of higher wages, just the way unions once upon a time extracted above market wages from employers that had pricing power?

Yes, that's the way I read it too, especially after reading the Larry Summers et al paper that Rayward cited in another post that shows labor salary for management *has* kept up with productivity increases since 1972 (not average labor salaries, but for management).

I've often wondered what a good, empirical, public choice analysis of modern corporations would show. It does seem that a fair amount of studies about separation of ownership and control, principal-agent problems and various types of moral hazard seem to point in the direction that 1) such rent-seeking is the norm and 2) the internal division or enterprise surplus is more a distributional question than an allocative question. Most still seem to think the allocative analysis is appropriate to understanding modern corporation with regard to income distribution.

Not sure about your second point, in that it's not clear, but in fact modern corporations do in fact intentionally have "fat" or "corporate deadwood" in them that they don't distribute to shareholders/society but keep in 'in-house', which corporate raiders in the modern era take advantage of. The theory by business gurus is that this fat allows corporations to replace departing employees quickly, with an in-house candidate. That is, if 2 people in corporation do the job of one, it's easier to replace a departing employee with the second, remaining employee. Of course corporate raiders take advantage of this to make money.

I thought the first person pronoun in the first sentence - I) - was some sort of fancy new gender designation.

Did the author consider that firms with pricing power prefer to stay private?

They are disputing the claims made in De Loecker and Eeckhout (2017) that mark-ups went from 18% in 1980 to 67% in 2014. Those authors use data on publicly traded companies to measure markups. The existing claims that measure mark-ups utilize data on publicly traded companies, so whether or not private companies have higher markups is not relevant to the debate the author is engaging in. Your concern is relevant when considering changes in shares of national income going to labor and capital (as mentioned in the first few sentences of the paper).

They are disputing the claims made in De Loecker and Eeckhout (2017) that mark-ups went from 18% in 1980 to 67% in 2014. Those authors use data on publicly traded companies to measure markups. The existing claims that measure mark-ups utilize data on publicly traded companies, so whether or not private companies have higher markups is not relevant to the debate the author is engaging in. Your concern is relevant when considering changes in shares of national income going to labor and capital (as mentioned in the first few sentences of the paper).

It's a bit odd that Traina uses data only going to 2010, when De Loecker and Eeckhout (2017) use data going through 2014. I wonder if there were any event that might make using 2010 as an end point a bit odd when the claims Traina is disputing use data ending in 2014...

I'm surprised that a Stigler Center paper wouldn't recognize the agency/bureaucracy problem in SG&A growth. That is, SG&A grows in firms where the COGS markup allows SG&A to be higher. And it stays higher (becomes sticky) because there is less competition. I previously ran the numbers on the relationship between Gross Margin (COGS/Rev) and SG&A Margin (SG&A/Rev) and it's significantly positive. Can easily make the argument that, like governments, bureaucrats in large companies (e.g., people in HR, Finance, Administration) in decreasingly competitive markets expand their bureaucracy as much as the company's economics can bear.

'I find that public firm markups increased only modestly since the 1980s.'

Well, for GM that is probably true. Mercedes, on the other hand ....

"Some circumstantial evidence is very strong, as when you find a trout in the milk."
Accordingly, when corporate profits are at an all-time high by any measure, it seems likely that there is significant pricing power *or* significant labor cost control (which is another form of pricing power).

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