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Agglomeration and Markup

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  • Lu, Yi
  • Tao, Zhigang
  • Yu, Linhui

Abstract

Agglomeration brings costs (e.g., intensified local competition) as well as benefits (e.g., knowledge spillover). It is important to examine the net impact of agglomeration to understand the geographic distribution of economic activities. In this study, we use firm markup (defined as the ratio of price over marginal cost) to capture the net impact of agglomeration. Using data from Chinese manufacturing firms in the 1998-2005 period, we first recover the markup ratio for each firm following De Locker and Warzynski (2012), and then use changes in industrial affiliation as a quasi-experiment to identify the impact of agglomeration on firm markup. Our difference-in-differences (DID) estimation shows that agglomeration has a negative impact on firm markup, suggesting that the devastating competition effect dominates the beneficial spillover effect in Chinese context. Moreover, we find that the impact of agglomeration on firm markup varies across different industries and types of firms.

Suggested Citation

  • Lu, Yi & Tao, Zhigang & Yu, Linhui, 2011. "Agglomeration and Markup," MPRA Paper 38974, University Library of Munich, Germany, revised May 2012.
  • Handle: RePEc:pra:mprapa:38974
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    References listed on IDEAS

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    2. Wu, Yan & Heerink, Nico & Yu, Linhui, 2020. "Real estate boom and resource misallocation in manufacturing industries: Evidence from China," China Economic Review, Elsevier, vol. 60(C).
    3. Alexander Vladimirovich Zyuzin & Olga Anatolyevna Demidova & Tatyana Grigoryevna Dolgopyatova, 2020. "Localization and Diversification of Russian Economy: Regions’ and Industries’ Peculiarities," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 2, pages 39-69.
    4. Daniel Berkowitz & Hong Ma & Shuichiro Nishioka, 2017. "Recasting the Iron Rice Bowl: The Reform of China's State-Owned Enterprises," The Review of Economics and Statistics, MIT Press, vol. 99(4), pages 735-747, July.

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    More about this item

    Keywords

    Agglomeration; Firm Markup; Difference-in-Differences Estimation; Spillover effect; Competition effect;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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