Company heterogeneity and mark-up variability

Mark-ups are often assumed to be constant for all firms within a sector in theoretical models. This paper reflects empirically on the distributions of companies mark-ups in order to test this assumption. We use exhaustive, Finnish company level micro-data to calculate the mark-up for each firm. The dataset covers 70 sectors from both the manufacturing and services sectors for the years 2005 to 2009. The wide variation of mark-ups found in some sectors suggests that assuming a constant mark-up estimate for all firms in the same sector is inappropriate. Our results indicate 16 out of 28 manufacturing and 31 out of 42 services sectors to support the heterogeneous mark-up assumption. We compare explicitly the mark-up distributions between companies of different size and exporting status. We find that small companies place on average higher mark-ups than large companies and domestic companies place higher mark-ups than exporting companies. Last, we characterize the sectors in which the assumption of homogenous mark-ups is to some extent justified. The results suggest that mark-up heterogeneity is greater in sectors with a low capital-labour ratio and high number of companies. Overall, mark-up heterogeneity is not prevalent only in few specific types of sectors, but seems like a wider phenomenon.