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How Costly are Mark-ups in Australia? The Effect of Declining Competition on Misallocation and Productivity

Author

Listed:
  • Jonathan Hambur

    (Reserve Bank of Australia)

  • Owen Freestone

    (Competition Taskforce Division, Australian Treasury)

Abstract

There is substantial evidence that the degree of competition in the Australian economy has declined over the decade or so leading up to the COVID-19 pandemic. This has the potential to weigh on productivity, and in turn incomes, and so the welfare of the Australian people. In this paper we calibrate the general equilibrium model from Edmond, Midrigan and Xu (2023) to Australian microdata to answer the following question: If the degree of competition in the Australian economy had not declined from mid-2000s levels, how much higher would aggregate productivity and GDP be due to resources being better allocated across firms throughout the economy? The answer, according to this model, is 1–3 per cent. The model also suggests even larger economic costs once we account for other channels through which rising mark-ups affect the economy, though these are less precisely estimated.

Suggested Citation

  • Jonathan Hambur & Owen Freestone, 2025. "How Costly are Mark-ups in Australia? The Effect of Declining Competition on Misallocation and Productivity," RBA Research Discussion Papers rdp2025-05, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2025-05
    DOI: 10.47688/rdp2025-05
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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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