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Markups and markdowns

Author

Listed:
  • Mauro Caselli

    (University of Trento)

  • Stefano Schiavo

    (Department of Economics [Università di Trento])

  • Lionel Nesta

    (Observatoire français des conjonctures économiques)

Abstract

This paper studies the high yet undocumented incidence of firms displaying markups lower than unity, i.e., prices lower than marginal costs, for protracted periods of time. Using a large sample of French manufacturing firms for the period 1990-2007, the paper estimates markups at the firm level and documents the extent to which firms exhibit negative price cost margins. The paper is able to provide an explanation for this phenomenon using the option value approach to investment decisions. The results suggest that firms facing higher investment irreversibility tend to continue operating even when prices fall below marginal costs as they wait for market conditions to improve. This effect is magnified in the presence of uncertainty.

Suggested Citation

  • Mauro Caselli & Stefano Schiavo & Lionel Nesta, 2017. "Markups and markdowns," Sciences Po publications 2017-11, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/4v3ds3it5k8isrrec0qlf7bt4m
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Markups; Irreversibility; Uncertainty; Negative price; Costs margine; French manufacturing data;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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