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Jan Eeckhout presents new paper examining profit margins and market power

Jan Eeckhout presents new paper examining profit margins and market power

Research studies data from 1950 to 2014 and documents the evolution of markups, secular trends, and rising market power

20.10.2017
Prof. Jan Eeckhout

Despite economic growth over the last few decades, wages have stagnated and more people of working age stay out of the labour force. Additionally, the duration of jobs is longer, which is better for job security but means that labour markets are less dynamic and there is less social mobility - fewer people switch jobs, and it takes longer to find one. But while workers in moderns times struggle, big business is thriving.

Professor of Economics Jan Eeckhout has presented a new paper at the National Bureau of Economic Research (NBER) that links markup prices over the last six decades to macroeconomic implications such these. The paper studies data spanning 1950 to 2014, documenting the evolution of markups and connecting several secular trends to the rise of market power since 1980.

From 1950 to around 1980, markups remained stable. A distinct, upward growth is observed from 1980 to today, with markups rising from 18% to 67% above cost by 2014. The cause of this sudden gain is not clear, but the paper suggests that lax antitrust enforcement and rapid technological change allow firms to create and entrench market power.

Market power is the ability of a firm to profitably raise the market price of a good or service above marginal cost. On average, corporate profits have gone up by a factor of four as compared to several decades ago. This is not the case for all firms, but the trend is that there is more market power.

This may have detrimental consequences not only for workers, who see wages driven down, but also for consumers, who pay higher prices. One recent example of a firm misusing their market power is the case of the EpiPen, a medical device that increased in price from less than $100 in 2007 to around $600 in 2016, despite a production cost of around $35 each.

The paper, "The Rise of Market Power and the Macroeconomic Implications", was written in collaboration with Prof. Jan De Loecker (Princeton).

The research has received attention in the media, including Financial Times, the Economist, the New York Times, the Wall Street Journal, and Bloomberg, amongst others.

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