Wage markups and buyer power in intermediate input markets
working paper download (KU Leuven Discussion Paper DPS22.06) Revise & Resubmit Journal of Political Economy
How are imperfections in different input markets related? I show how to estimate the wedge between an input’s price and its marginal revenue product using financial statements without requiring any input market to be perfectly competitive, and apply this approach to Dutch manufacturing. Firms mark down intermediate input prices relative to their marginal revenue product, while both wage markups and wage markdowns are common in labor markets. A model where firms face upward sloping supply curves in both input markets, and collective bargaining determines wages, can rationalize these findings, but not a model that only allows for imperfections in a single input market. In line with this rent-sharing framework, I show that as the Euro appreciates, markdowns and rents in the intermediate input market of firms that import intermediates from China increase, and workers see their wages increase, even though labor does not become more revenue productive on average or on the margin.
Employment relationships, wage setting, and labor market power (joint with Francesco Agostinelli, Domenico Ferraro, and Giuseppe Sorrenti)
working paper download (NBER Working Paper No. 34439)
We ask to what extent the quantification of labor market power depends on the modeling of the long-term worker-firm employment relationship. We develop an oligopsony model with dynamic wage contracts. Workers decide whether and where to work, choosing among firms providing different amenities and solving a dynamic discrete choice labor supply problem with firm-specific human capital. As a result, firms optimally choose wage-tenure contracts to attract and retain workers. We find that such contracts mitigate firms' incentives to impose large instantaneous wage markdowns—compared to standard static wage-setting models—thereby reducing the share of socially inefficient worker-firm separations. As a consequence, we show that the empirical approaches based on "sufficient statistics" tend to overestimate the extent of labor market power: low levels of firm-specific labor supply elasticities do not necessarily indicate rent extraction, but instead reflect firms’ ability to retain workers by offering long-term value through human capital accumulation.
The anatomy of costs and firm performance: Evidence from Belgium (joint with Jan De Loecker, Catherine Fuss, and Nathan Quiller-Doust)
working paper download (CEPR Discussion Paper DP19641) Revise & Resubmit International Journal of Industrial Organization (Special Issue on Market Power)
We separately observe variable input expenditure and expenditure on fixed inputs in novel firm-level data covering the Belgian manufacturing sector over the last decades. This permits a deeper investigation of two potential drivers of the globally observed widening gap between firms’ revenue and variable input expenditure: technology and market power. Across the board, cost structures have become less reliant on variable input expenditure over time, while expenditure on fixed inputs or overhead costs has increased in prominence. We relate these changes in firms’ cost structures to performance measures and document that markups and gross profit rates increase substantially as the role of variable costs in production diminishes. Profit rates net of fixed input expenditure also increase, but by substantially less than gross profit rates. Our results suggest that technological change can explain a considerable portion of the widening gap between revenue and variable input expenditure, but that markups increase by more than necessary to break even, and that this phenomenon operates remarkably similarly across different firms and industries.
Spillovers from legal cooperation to non-competitive prices (joint with Jeroen Hinloopen, Stephen Martin, and Sander Onderstal)
working paper download (Tinbergen Institute Discussion Paper 2024-078/VII)
Antitrust laws prohibit private firms to coordinate their market behavior, yet many types of interfirm cooperation are legal. Using laboratory experiments, we study spillovers from legal cooperation in one market to non-competitive prices in a different market. Our theoretical framework predicts that such cooperation spillovers are most likely to occur for intermediate levels of competition. Our experimental findings support this theoretical prediction. In addition, our experimental results show that repeated interaction and communication about prices in a market are not necessary to achieve non-competitive prices in that market, as long as subjects can form binding agreements in a different market. Results from additional treatments suggest that commitment and multimarket contact are necessary for cooperation spillovers to emerge.
How the design of cartel fines affects prices: Evidence from the lab (joint with Sindri Engilbertsson and Sander Onderstal)
working paper download (Tinbergen Institute Discussion Paper 2025-012/VII)
Competition authorities impose substantial penalties on firms engaging in illegal pricefixing. We examine how basing cartel fines on either revenue, profit, or price overcharge influences cartel and market prices, as well as cartel incidence and stability. In an infinitely repeated Bertrand oligopoly game, we show that revenue-based fines incentivize firms to charge prices above the monopoly price, whereas only overcharge-based fines encourage prices below the monopoly price. Cartels are stable for a smaller range of discount factors when fines are based on overcharges rather than other bases. We test these predictions in a laboratory experiment where subjects can form cartels, which allows them to discuss pricing at the risk of being detected and fined. By equalizing expected fines across treatments, we isolate the effect of the fine’s base. We find that market prices are lowest under overcharge-based fines and highest under revenue-based fines. Variation in market prices across treatments is fully driven by cartel prices. While these results align with the theoretical predictions, cartel incidence remains unchanged across regimes. Our results suggest competition authorities could improve enforcement by shifting from revenue-based fines to profit- or overcharge-based fines.
Corporate social responsibility by joint agreement (joint with Maarten Pieter Schinkel)
Journal of Environmental Economics and Management, 123, 2024. Tinbergen Institute Discussion Paper 2021-063/VII
Production agreements, sustainability investments, and consumer welfare (joint with Maarten Pieter Schinkel and Yossi Spiegel)
Economics Letters, 216, 2022. CEPR Discussion Paper DP16991
Cartel stability in experimental first-price sealed-bid and English auctions (joint with Jeroen Hinloopen and Sander Onderstal)
International Journal of Industrial Organization, 71, 2020. Tinbergen Institute Discussion Paper 2019-009/VII
Elf adviezen voor het gebruik van empirische methoden voor mededingingsbeleid (joint with Joris Pinkse and Jurre Thiel)
In: Haan, M. and M. P. Schinkel (eds.) KVS Preadviezen 2020 Mededingingsbeleid, Koninklijke Vereniging voor de Staathuishoudkunde, Amsterdam, 2020.
Beter geen mededingingsbeperkingen voor duurzaamheid (joint with Maarten Pieter Schinkel)
In: Haan, M. and M. P. Schinkel (eds.) KVS Preadviezen 2020 Mededingingsbeleid, Koninklijke Vereniging voor de Staathuishoudkunde, Amsterdam, 2020.