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Agglomeration and Markup

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

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38974.

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Date of creation: Jun 2011
Date of revision: May 2012
Handle: RePEc:pra:mprapa:38974
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