Several academic papers have alleged that increased market concentration in many U.S. industries has cleared the way for companies to mark up their prices far beyond marginal costs. But a new report released today by the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy, finds that markups have only slightly increased in some industries, while staying roughly the same in all others. Furthermore, to the extent that markups have risen, their increase has been the same in small and large firms alike, a sign that market power is not the cause.
“Markups are notoriously difficult to measure, especially at the firm level, and in many cases the increases we see are a result of miscalculations. Studies that have examined markups using a broader definition of fixed and variable costs have found little or no increase,” says Joe Kennedy, a senior fellow at ITIF, who authored the report. “Overall evidence suggests that, while markups have risen in some industries, in most of them they have stayed largely the same.”
The report shows that miscalculating the growth of markups usually happens when researchers omit changes in marginal costs, especially related to the growing share of intangible capital, such as research and development and software, whose increase makes it appear that price markups are going up, when in fact they may not be.
In other cases, such increases are the result of intensified competition, as more productive and successful firms gain market share against laggards. “In these cases, markups can increase either because firms are more efficient or because they offer slightly better products or services that consumers are willing to pay more for—not because of monopoly power,” adds Kennedy.
The Information Technology and Innovation Foundation (ITIF) is an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. Recognized as the world’s leading science and technology think tank, ITIF’s mission is to formulate and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress.
