Working Paper

Structural Change and the Rise in Markups

Abstract: Is the recent rise in markups caused by increased monopoly power or is it a natural consequence of structural change? I show that the rise in aggregate markups has been driven by a reallocation of market share away from non-services to services-producing firms and a faster increase of services’ markups. I develop a two-sector model to assess the sources of the rise in markups, in which the two forces of structural change play opposing roles. On one hand, an increase in the relative productivity of manufacturing leads to a decline of the relative price of manufactured goods and to an increase of the goods markups. On the other hand, the increase in incomes that triggers the rise of the services sector leads to higher markups for firms in services. I show that the rise in markups is in line with the rise of the services sector and the fall of the relative price of manufactured goods, and may not necessarily reflect a decline of competition. I provide novel experimental evidence supporting the notion that the price elasticity of demand decreases with income.

Keywords: endogenous markups; income elasticity of demand; manufacturing; non-homothetic preferences; online experiment; price elasticity of demand; services; skill premium; structural change; survey; technological progress;

JEL Classification: D11; D12; D22; D43; E21; E23; L11; L16; O41; O47;

https://doi.org/10.20955/wp.2024.002

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2023-11

Number: 2024-002