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Prices under Innovation: Evidence from Manufacturing Firms

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  • Jordi Jaumandreu

  • Shuheng Lin

Abstract

We study how ï¬ rms’ innovations impact prices with endogenous productivity and markup, under imperfect competition and dynamic pricing. Absent innovation, productivity plus markup changes curb price growth to half of variable inputs cost growth. Innovation’s additional impact on costs is negatively correlated with markup changes. We detect two prevalent strategies. When marginal cost goes down, ï¬ rms cash-in innovation by increasing the markups to enlarge proï¬ ts. When marginal cost goes up, ï¬ rms practice countervailing pricing by decreasing markups. With no innovation aggregate manufacturing price growth had multiplied by 1.4, but innovation without cash-in strategies had multiplied it by 0.8.
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Suggested Citation

  • Jordi Jaumandreu & Shuheng Lin, 2018. "Prices under Innovation: Evidence from Manufacturing Firms," Working Papers 2019-07-04, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    • Handle: RePEc:wyi:wpaper:002435
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    Cited by:

    1. Jaumandreu, Jordi & Doraszelski, Ulrich, 2019. "Using Cost Minimization to Estimate Markups," CEPR Discussion Papers 14114, C.E.P.R. Discussion Papers.

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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