Markup dynamics and financial frictions: The Spanish case

In this paper, we estimate price markups on a panel of Spanish manufacturing firms for the period 2000–2012 ​at a 3-digit sectoral level. Our results reveal that there is no evidence of large market power in the industries considered; however, in around 60% of these industries average markups either increased or remained stable over the crisis (2008–2012), despite the sharp fall in economic activity. We examine whether this result is related to the extremely tight financial conditions faced by Spanish corporations during the crisis. In this setting, firms may try to boost current profits by increasing markups –and possibly foregoing market share– to cover their financial commitments and fund their operations. We find a positive association between our measure of financial pressure and the estimated change in average markups between 2000-2007 and 2008–2012. This result suggests that those manufacturing industries more exposed to financial shocks by the end of the expansionary period tended to experience a larger increase in markups over the crisis.