Broadband Access and Markups in Europe

What is the relationship between internet (broadband) connectivity shocks, markups, and fixed costs? We address the issue by exploiting a large dataset based on balance sheets of European firms. Broadband shocks raise sales, profits-to-sales ratios, fixed costs, and markups of firms that are large, are more efficient (high TFP) and already bear large fixed costs. For these firms, the shock therefore is expansionary, and firms exploit it to raise profit margins. Firms at the opposite tails of the distribution exhibit a substantially muted response. Our results hint that the shock lowers the cost of entering new markets, inducing some firms to bear larger fixed costs as part of their profit-maximizing strategy.