IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/9703.html
   My bibliography  Save this paper

Profiting from Innovation: Firm Level Evidence on Markups

Author

Listed:
  • Cassiman, Bruno
  • Vanormelingen, Stijn

Abstract

While innovation is argued to create value, private incentives of firms to innovate are driven by what part of the value created firms can appropriate. In this paper we explore the relation between innovation and the markups a firm is able to extract after innovating. We estimate firm-specific price-cost margins from production data and find that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the firm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the firm's patenting and promotion behavior, the age of the firm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the firm's markup.

Suggested Citation

  • Cassiman, Bruno & Vanormelingen, Stijn, 2013. "Profiting from Innovation: Firm Level Evidence on Markups," CEPR Discussion Papers 9703, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9703
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9703
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    2. Jan De Loecker & Pinelopi K. Goldberg & Amit K. Khandelwal & Nina Pavcnik, 2016. "Prices, Markups, and Trade Reform," Econometrica, Econometric Society, vol. 84, pages 445-510, March.
    3. Perloff,Jeffrey M. & Karp,Larry S. & Golan,Amos, 2007. "Estimating Market Power and Strategies," Cambridge Books, Cambridge University Press, number 9780521011143, March.
    4. Doraszelski, Ulrich & Jaumandreu, Jordi, 2006. "R&D and productivity: Estimating production functions when productivity is endogenous," MPRA Paper 1246, University Library of Munich, Germany.
    5. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    6. Campa, Jose Manuel, 2004. "Exchange rates and trade: How important is hysteresis in trade?," European Economic Review, Elsevier, vol. 48(3), pages 527-548, June.
    7. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-365, June.
    8. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
    9. Jan De Loecker, 2011. "Product Differentiation, Multiproduct Firms, and Estimating the Impact of Trade Liberalization on Productivity," Econometrica, Econometric Society, vol. 79(5), pages 1407-1451, September.
    10. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
    11. Huergo, Elena & Jaumandreu, Jordi, 2004. "Firms' age, process innovation and productivity growth," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 541-559, April.
    12. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    13. Delgado, Miguel A. & Farinas, Jose C. & Ruano, Sonia, 2002. "Firm productivity and export markets: a non-parametric approach," Journal of International Economics, Elsevier, vol. 57(2), pages 397-422, August.
    14. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
    15. Jacques Mairesse & Jordi Jaumandreu, 2005. "Panel-data Estimates of the Production Function and the Revenue Function: What Difference Does It Make?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(4), pages 651-672, December.
    16. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2011. "Multiproduct Firms and Trade Liberalization," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1271-1318.
    17. Anne Marie Knott, 2008. "R& D/Returns Causality: Absorptive Capacity or Organizational IQ," Management Science, INFORMS, vol. 54(12), pages 2054-2067, December.
    18. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    19. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    20. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
    21. Siotis, Georges, 2003. "Competitive pressure and economic integration: an illustration for Spain, 1983-1996," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1435-1459, December.
    22. Filip Abraham & Jozef Konings & Stijn Vanormelingen, 2009. "The effect of globalization on union bargaining and price-cost margins of firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(1), pages 13-36, April.
    23. Roeger, Werner, 1995. "Can Imperfect Competition Explain the Difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 316-330, April.
    24. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    25. Wooldridge, Jeffrey M., 2009. "On estimating firm-level production functions using proxy variables to control for unobservables," Economics Letters, Elsevier, vol. 104(3), pages 112-114, September.
    26. Jordi Jaumandreu & Jacques Mairesse, 2010. "Innovation and Welfare: Results from Joint Estimation of Production and Demand Functions," NBER Working Papers 16221, National Bureau of Economic Research, Inc.
    27. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    28. Schneider, Cedric & Veugelers, Reinhilde, 2008. "On Young Innovative Companies: Why they matter and how (not) to policy support them," Working Papers 04-2008, Copenhagen Business School, Department of Economics.
    29. repec:pri:cepsud:231deloecker is not listed on IDEAS
    30. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. José Manuel Montero & Alberto Urtasun, 2014. "Price-cost mark-ups in the Spanish economy: a microeconomic perspective," Working Papers 1407, Banco de España;Working Papers Homepage.
    2. Cristina Fernández & Aitor Lacuesta & José Manuel Montero & Alberto Urtasun, 2015. "Heterogeneity of markups at the firm level and changes during the great recession: the case of spain," Working Papers 1536, Banco de España;Working Papers Homepage.
    3. Malamud, Semyon & Zucchi, Francesca, 2015. "Liquidity, Innovation, and Endogenous Growth," CEPR Discussion Papers 10840, C.E.P.R. Discussion Papers.
    4. Bin-Tzong Chie & Shu-Heng Chen, 2014. "Competition in a New Industrial Economy: Toward an Agent-Based Economic Model of Modularity," Administrative Sciences, MDPI, Open Access Journal, vol. 4(3), pages 1-27, July.
    5. Malamud, Semyon & Zucchi, Francesca, 2016. "Liquidity, innovation, and endogenous growth," Working Paper Series 1919, European Central Bank.
    6. Irene Brambilla & Darío Tortarolo, 2014. "An Empirical Analysis of Mark-ups in the Argentine Manufacturing Sector," Department of Economics, Working Papers 104, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.

    More about this item

    Keywords

    markup; process innovation; product innovation; productivity;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9703. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.