Unravelling the Markups Changes: The Role of Demand Elasticity and Concentration

Abstract

We propose a framework allowing to identify sources changes in aggregate markups. Our approach derives from the conjectural variation theory and allows to evaluate the role of price elasticity of demand as well as concentration in shaping the markups. In the empirical part, we show that a decline in the aggregate markups in Poland, showed by Gradzewicz and Mućk (2019), can be explained to a large extent by rising demand elasticity, while rising concentration has mitigated this effect. We also document that at the industry level the globalization trends, e.g. international fragmentation, increasing standardization and tighter integration with global economy, affect both demand elasticity and markups but in a theory-consistent, inverse way. Besides, we identify factors which are specific to demand elasticity (product varieties and a home bias) and the markups (import content of exports).