Rising Markups or Changing Technology?

Recent evidence suggests the U.S. business environment is changing with rising market concentration and markups. Accompanying these changes is rising dispersion of markups across firms. From the perspective of misallocation models, these changes are a drag on welfare and productivity. The most prominent and extensive evidence backs out firm-level markups from the first-order conditions for variable factors. The markup is identified as the ratio of the output elasticity to the cost share of revenue of the variable factor. Output elasticities are estimated at an industry level allowing for relatively little variation either over time or across firms within the same industry. Our analysis starts from this indirect approach but we exploit a long panel of manufacturing establishments to permit output elasticities to vary to a much greater extent across establishments within the same industry over time. With our more detailed estimates of output elasticities, the measured increase in markups is substantially dampened. As supporting evidence, we relate differences in the markups’ patterns to observable changes in technology (computer investment per worker, capital intensity) versus market structure (concentration ratios) and find patterns in support of changing technology as the driver.

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