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Markups, Productivity, and External Market Development: An empirical analysis using SME data in the service industry

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  • KATO Atsuyuki
  • KODAMA Naomi

Abstract

During the last decade, economists and policy makers have extensively discussed what types of firms can exploit external markets by exporting and what happens to domestic firms if external competitors penetrate into the home market. Although both theoretical and empirical studies have been dedicated to these issues, few have been carried out for the service sector. Since the service sector accounts for the lion's share of GDP, the lack of those studies indicates that a large part of the actual economy still remains veiled. Our study fills this gap. We examine whether or not the Melitz and Ottaviano (2008) model remains satisfied in the service sector, using data from Japanese SMEs. From our analysis, we confirm that larger market sizes are associated with higher productivity levels and lower markups. This finding also holds true for samples including firms that see simultaneity between production and consumption. These results reveal that further productivity growth in the service sector also requires markets to be larger and more integrated, and that the markup levels become lower in those markets.

Suggested Citation

  • KATO Atsuyuki & KODAMA Naomi, 2011. "Markups, Productivity, and External Market Development: An empirical analysis using SME data in the service industry," Discussion papers 11057, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:11057
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    References listed on IDEAS

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    1. Stephen Bond & Måns Söderbom, 2005. "Adjustment Costs and the Identification of Cobb Douglas Production Functions," Economics Papers 2005-W04, Economics Group, Nuffield College, University of Oxford.
    2. KATO Atsuyuki, 2010. "Mark-up, Productivity and Imperfect Competition: An empirical analysis of the Japanese retail trade industry," Discussion papers 10031, Research Institute of Economy, Trade and Industry (RIETI).
    3. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
    4. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    5. Martin, Ralf, 2010. "Productivity spreads, market power spreads and trade," LSE Research Online Documents on Economics 48912, London School of Economics and Political Science, LSE Library.
    6. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    7. WAKASUGI Ryuhei & TODO Yasuyuki & SATO Hitoshi & NISHIOKA Shuichiro & MATSUURA Toshiyuki & ITO Banri & TANAKA Ayumu, 2008. "The Internationalization of Japanese Firms: New Findings Based on Firm-Level Data," Discussion papers 08036, Research Institute of Economy, Trade and Industry (RIETI).
    8. Bellone, Flora & Musso, Patrick & Nesta, Lionel & Warzynski, Frederic, 2008. "Endogenous Markups, Firm Productivity and International Trade: : Testing SomeMicro-Level Implications of theMelitz-Ottaviano Model," Working Papers 08-20, University of Aarhus, Aarhus School of Business, Department of Economics.
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