How Costly Are Markups?

We study the welfare costs of markups in a dynamic model with hetero- geneous firms and endogenous markups. We provide aggregation re- sults summarizing the macro implications of micro-level markup het- erogeneity. We calibrate our model to US Census of Manufactures data and find that the costs of markups can be large. We decompose the costs into three channels: an aggregate markup that acts like a uni- form output tax, misallocation of factors of production, and ineffi- cient entry. We find that the aggregate-markup and misallocation channels account for most of the costs of markups and that the entry channel is much less important.

Duke Scholars

Author Daniel Yi Xu Economics