(Editor’s note: This article was first published on VoxEU.org)

There has been increasing public debate about the rise of corporate market power and industry concentration while corporate giants in high-tech industries boom, and important macroeconomic changes occur. Indeed, in policy and academic circles, the discussion was, in fact, spurred by recent work that documented a decline in competition in the US, linked to a slowdown in business dynamism, low investment, and declining labour share (Council of Economic Advisers 2016, De Loecker and Eeckhout 2017, Gutierrez and Philippon 2017).

Some studies have focused on what drives this increase in market power. For instance, Gutierrez and Philippon (2018) find lower concentration in European markets compared to the US, and attribute this to differences in antitrust frameworks. In contrast, Van Reenen (2018) explains the observed increase in market power using globalization and technological change.

Other studies have focused on the implication of increasing markups for the aggregate economy. For example, Baqaee and Farhi (2017) find that eliminating markups in the US would increase total factor productivity by 20 percent. Edmond et al. (2018) show that aggregate markups act as a tax on output, and cause misallocation of inputs.

Most of this work focuses on publicly listed firms from the US. Our recent work (Díez et al. 2019) looks at the evolution of market power around the world between 2000 and 2015. We have examined aggregate markup trends in 28 advanced and emerging countries, making use of a panel of publicly listed and privately held firms. Analyzing privately held firms was particularly important, because it allowed us to explore in-depth the role of firm heterogeneity and size. We found four stylized facts.

Global Markups Increased by 6 Percent Between 2000 and 2015, Concentrated in Advanced Economies

Figure 1 shows the average evolution of firm markups. The 6 percent increase, while significant, is less than the increase in the US estimated by De Loecker and Eeckhout (2017, 2018) and Díez et al. (2018). The overall increase is driven by advanced economies, while markups in emerging markets during this period have been mainly stagnant.

Figure 1: Average global markup, 2000-2015. Source: Díez et al. (2019)

The Increase in Markups Is Driven by the Behavior of High-Markup Firms, But Most Firm Markups Are Practically Unchanged Since 2000

The increase in Figure 1 averages three groups of firms:

  • High-markup firms: These correspond to the upper decile of the markup distribution.

  • Middle-markup firms: Markups are between the median and the 90th percentile.

  • Bottom-half-markup firms: Those below the median.

Figure 2 shows stark differences in behavior. High-markup firms increased their markups by 40 percent, while the bottom half kept their markups unchanged. Firms in the middle of the distribution increased markups only slightly.

Figure 2: High-markup firms behaved differently to others, 2000-2015. Source: Díez et al. (2019)

The high-markup group includes some large or listed firms but, surprisingly, most firms in this group are small and privately held. This highlights the importance of including these firms in the analysis. This behavior makes sense if we imagine firms operating in niche markets (described, for example, by Holmes and Stevens 2014). In these markets, firms can thrive while optimally remaining small.

Conditional on firm size, high-markup firms are 20 percent more productive, report 3 percent higher profits, and are 2 percent more likely to spend on intangible assets. They are found in all economic sectors, which means that even within four-digit industries there has been a significant increase in the dispersion of firm markups.

There Is a Non-Monotonic U-shaped Relationship Between Firm Size and Markups

Figure 3 plots the share of average sales by firms in each decile of the markup distribution.

Figure 3: Share of revenue per decile of the markup distribution, 2000-2015. Source: Díez et al. (2019)

While markup and firm size are negatively related overall, there is an (unconditional) positive correlation when focusing on the three upper deciles. We explored the conditional correlation between firm markups and size (measured as a firm’s market share) in a regression framework that controls for firm productivity, overhead costs, and includes country-industry-year fixed effects. In this setup, there is a negative coefficient on the linear market share and a positive coefficient on the quadratic term. The total effect, therefore, varies by firm size, being negative at first and becoming positive towards the upper end of the market-share distribution.

The Increase in Markups Is Mostly Explained by Within-Firm Increases Among Incumbent Firms and, to a Lower Extent, by Market Share Reallocation Towards High-Markup Entrants

We then decomposed the increase in average firm markups over time into the contribution by incumbent, entering, and exiting firms, using a method from Melitz and Polanec (2015). We also decomposed the increase of each type of firm into a ‘within’ component of firms increasing their own markups over time, and a ‘reallocation’ component, which captures the increase in the aggregate markup as high-markup firms increase in size.

Table 1 shows the results of the decomposition for a baseline sample of firms.

Table 1: Dynamic firm markup decomposition, baseline sample, 2000-2015. Source: Díez et al. (2019)

As we can see, 70 percent (0.045/0.064) of the markup change between 2000 and 2015 is explained by incumbent firms. Along the extensive margin, entering firms positively contribute to the markup growth during the period, explaining 42 percent of the observed increase, while exiting firms have limited contribution that brings the markup growth rate slightly down.

The decomposition highlights some interesting differences. Among incumbent firms, within-firm increases explain most of the increase in average markups for the group. But there is a negative reallocation effect that reduces the markup increase. In turn, entering firms do not set, on average, higher markups than incumbent firms, but entrants with high markups have higher market shares than incumbents.

To summarise, the markup increase between 2000 and 2015 is mainly explained by increases in the average markup of incumbents and large reallocation effects towards new firms that gain market share from incumbents.

Given the relationship between markups and size commented above, in Table 2 we report the corresponding decomposition for firms in the 95th percentile of the real sales distribution.

Table 2: Dynamic firm markup decomposition, firms in 95th percentile of the sales distribution, 2000-2015. Source: Díez et al. (2019)

In this case, the reallocation effects from both incumbents and entrants explain 60 percent of the average markup increase between 2000 and 2015.

This pattern is even more pronounced for US firms in the sample, including some of the largest firms in the world. In this case, we find an aggregate markup increase almost twice as large as the one for the whole sample (11.5 percent) but, at the same time, the reallocation effects account for almost 80 percent of the total increase. These findings are consistent with Baqaee and Farhi (2017) that, using data on US-listed companies, find evidence consistent with resources being allocated towards high-markup firms. It also supports the findings on superstar firms of Autor et al. (2017). This implies a difference between the US firms and the rest of our sample (made up of mainly European firms) – a large and significant reallocation of resources away from low-markup firms toward high-markup ones.

Takeaways From the Evolution of Markups

These findings on the evolution of markups and the role of firm heterogeneity are relevant to understand competition in different markets, and to think about appropriate policy responses.

The increase in markups is broad-based across countries and sectors but is concentrated in just a few firms. This may be indicative of winner-takes-most dynamics. But we will need more evidence on the link between high-markup firms and observed changes in real economic outcomes (lower investment, lower innovation or decreases in the labor share) to fully gauge the importance of this phenomenon for the overall economy, and the potential long-term effects.


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Baqaee, D R and E Farhi (2017), “Productivity and Misallocation in General Equilibrium”, NBER working paper 24007.

Council of Economic Advisers (2016), “Benefits of Competition and Indicators of Market Power”, CEA Issue Brief April 2016.

De Loecker, J and J Eeckhout (2017), “The Rise of Market Power and the Macroeconomic Implications”, NBER working paper 23687.

De Loecker, J and J Eeckhout (2018), “Global Market Power”, NBER working paper 24768.

Díez, F, J Fan, and C Villegas-Sanchez (2019), “Global Declining Competition”, CEPR discussion paper DP13696.

Díez, F, D Leigh, and S Tambunlertchai (2018), “Global Market Power and its Macroeconomic Implications”, IMF working paper 18/137.

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Gutierrez, G, and T Philippon (2018), “How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift”, NBER working paper 24700.

Holmes, T J, and J J Stevens (2014), “An Alternative Theory of the Plant Size Distribution, with Geography and Intra- and International Trade”, Journal of Political Economy 122(2): 369-421.

Melitz, M J, and S Polanec (2015), “Dynamic Olley-Pakes Productivity Decomposition with Entry and Exit”, RAND Journal of Economics 46(2): 362-375.

Van Reenen, J (2018), “Increasing Differences Between Firms: Market Power and the Macro-Economy”, Centre for Economic Performance discussion paper DP1576, London School of Economics.

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