Key industrial policy, market competition and firms’ markup: Evidence from China

The relationship between the government and the market has long been a core issue in economics. This study analyzes key industrial policy information in the “Five-Year Plan” of the Chinese central government. We use data from the Annual Survey of Industrial Firms to test the impact and mechanisms of key industrial policies on markups, and further analyze these findings. The empirical results demonstrate that key industrial policies significantly reduce firms' markups, and this conclusion remains robust across different tests. Additionally, the mechanism by which key industrial policy reduces firms’ markups is primarily through the “transaction cost channel,” the “factor resource cost channel” and “market competition effect.” For different types of firms, industrial policies have heterogeneous effects on markups, with key industrial policies having noticeable asymmetric effects on firms occupying different positions in the market. Our findings provide further insights into the interaction mechanisms between the government and the market.