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Energy, Inflation and Market Power: Excess Pass-Through in France

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  • Axelle Arquié
  • Malte Thie

Abstract

We explore how, in the French manufacturing sector, producer prices vary with market power during a severe episode of energy price hikes (between January 2020 and February 2023). Our work provides some empirical evidence in favor of a role for firms' market power in explaining inflation, and in favor of the "sellers' inflation" hypothesis (Weber and Wasner 2023): in less competitive sectors, firms could use the energy price hike to increase their prices more than warranted by actual changes in costs. Using a rich dataset on French manufacturing firms' balance sheets, we first estimate markups at the firm-level, and aggregate them at the sectoral level. We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors. We show that, in sectors with higher markups, prices increase relatively more: in the least competitive sector, firms pass through up to 110% of the energy shock, implying an excess pass-through of 10 percentage points. In addition, we find that the association between markup and pass-through is even higher when markup dispersion is low, consistent with the argument that firms engage in price hikes when they expect their competitors to do the same.

Suggested Citation

  • Axelle Arquié & Malte Thie, 2023. "Energy, Inflation and Market Power: Excess Pass-Through in France," Working Papers 2023-16, CEPII research center.
    • Handle: RePEc:cii:cepidt:2023-16
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Inflation ; Markups;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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