Working papers
Rising Markups and the Role of Consumer Preferences, with H. Döpper, A. MacKay and N. Miller. Resubmitted to Journal of Political Economy.
We characterize the evolution of markups for consumer products in the United States from 2006 to 2019. We use detailed data on prices and quantities for products in more than 100 distinct product categories to estimate demand systems with flexible consumer preferences. We recover markups under an assumption that firms set prices to maximize profit. Within each product category, we recover separate yearly estimates for consumer preferences and marginal costs. We find that markups increase by about 25 percent on average over the sample period. The change is attributable to decreases in marginal costs that are not passed through to consumers in the form of lower prices. Our estimates indicate that consumers have become less price sensitive over time.
The Unintended Consequences of R&D Tax Credits, with B. Balsmeier, L. Fleming and M. Veihl. Resubmitted to Review of Economics and Statistics.
R&D tax credit policies aim to increase investment in research and experimentation, hoping that firms invent fundamentally new technologies. Since policies require that companies make profits to claim tax credit, they might shift firms’ investments towards less risky exploitation of previously patented technologies. We use exogenous tax credit introductions in eleven states to illustrate such shift. Firms take advantage of tax credits by increasing innovative output, driven by inventions in areas of their previous patenting activity. This shift is stronger for firms in uncertain markets where failures in innovative search are more likely to diminish the tax credit benefit.
Foreign Direct Investment, Prices and Productivity, with N. Ali. Resubmitted to Journal of International Economics.
This paper uses a rich panel data set of Indian manufacturing firms to analyze the effects of foreign direct investment (FDI) on various outcomes of domestic firms. We apply recent methodological advances in the estimation of production functions together with detailed product-level information on prices and quantities to estimate physical productivity, markups and marginal costs. Our results indicate the importance of price adjustments which stem from competitive pressure and a pass-through of cost savings to consumers. In line with the previous literature, we find little evidence for spillovers based on commonly used measures of revenue productivity. In contrast, we measure sizable efficiency gains using measures that are not affected by pricing heterogeneity, such as marginal costs and physical productivity. Exploiting exogenous variation from India's FDI liberalization, we provide evidence that the relationship between exposure to FDI and efficiency is causal. Our results suggest that knowledge spills over across product categories within industries and mainly benefits producers of high-quality products. We also provide evidence that FDI spillovers are stronger for joint ventures and when foreign investors enter via acquisitions.
Robots and the Rise of European Superstar Firms, with J. Südekum and N. Woessner. Accepted at International Journal of Industrial Organization.
We study how a recent digital automation technology - industrial robotics - is associated with the distribution of sales, productivity, markups, and profits within industries. Our empirical analysis combines data on the industry-level stock of industrial robots with firms' balance sheet data for six European countries from 2004 to 2013. We find that industries with high robot exposure are characterized by dis-proportional increases in productivity in those firms that are already most productive to begin with. Those firms are able to increase their markups and overall profits, while they tend to decline for less profitable firms within the same industry, country and year. We also find that variation in robot exposure across industries is correlated with declining labor income shares, mainly through adjustments within firms that are initially large, productive and have low labour cost to sales ratios. In sum, our paper suggests that European manufacturing industries with higher robot adoption rates experience higher emergence of superstar firms and more pronounced shifts of the functional income distribution away from wages and towards profits.
Export Performance under Domestic Anti-dumping Protection, with A. Ciani. Accepted at World Development.
This paper investigates the effects of import protection on export performance at the firm-product level. We exploit product-specific information on anti-dumping (AD) measures imposed by Peru along with several indicators on the performance of Peruvian exporting firms across and within destination markets. Findings indicate that the impact of protection on export performance depends on which economies are targeted by domestic AD protection. Duties towards China are associated with significantly higher prices, especially among small exporting firms. These firms also reduce their shipments, as suggested by frameworks stressing the role of adjustment costs. In contrast, when AD measures are imposed on competitors from middle- and high-income countries, exporters decrease prices and increase quantities, consistent with the presence of learning curves and economies of scale.
Gains from Patent Protection: Innovation, Market Power and Cost Savings in India, with A. Gupta. Under review.
This paper uses the implementation of a TRIPS compliant patent regime in India to study the effect of stronger patent protection on innovation and market power. Exploiting cross-industry variation in the importance of patents, we find that the reform led to more patent applications and higher investment in research and development for firms more exposed to the reform. We also estimate an increase in average firm-product level markups which can be mainly attributed to lower marginal costs, not higher prices. Our results indicate that process innovations and output expansion have contributed to these cost savings.
Horizontal Mergers and Market Power in India, with N. Ali.
This paper analyzes the effects of horizontal mergers in Indian manufacturing. Detailed information on prices and quantities at the level of narrowly defined product categories allows us to identify merger-pairs with product overlap and non-merging rival firms across a broad set of industries. We apply recent methodological advances in the estimation of production functions to estimate markups, marginal costs and proxies for product quality. Our results indicate that, on average, mergers are associated with increases in prices and markups within the merged entity and its competitors while there is little evidence for cost savings. Further, average product quality seems to increase within merging firms.
Non-price Effects of Mergers and Acquisitions, with J. Haucap. R&R at Journal of Competition Law and Economics.
In this paper, we summarize the economic literature on non-price effects of mergers and acquisitions (M&As). Specifically, we discuss the effects of M&As on innovation, product variety, and sustainability. Although the relationship is theoretically ambiguous, the vast majority of ex-post evaluations of horizontal M&As finds large negative effects on innovation inputs and outputs. Results are mixed for outcomes related to variety and product quality. Literature on merger effects on sustainability is still scarce and not conclusive so far. Overall, the existing literature indicates that non-price effects of horizontal mergers seem to amplify negative consequences for consumers from price increases through reduced competition. We derive a number of ideas and options for merger policy