Increasing market power in Slovenia: Role of diverging trends between exporters and non‐exporters

This paper documents the evolution of markups in a small open economy, Slovenia, using a comprehensive data set covering the full population of firms. It makes three novel contributions to the literature. First, in contrast to other work for Europe, we find that markups have increased from 1.05 to 1.19 between 1994 and 2015. Second, while other research so far found exporters typically to have higher markups, we find the opposite in Slovenia. Though the rise in markups occurs both with exporters and non‐exporters, there is a consistent diverging trend in markups in favour of non‐exporters since 1999. This can be attributed to increased competitive pressure faced by exporters following the comprehensive trade liberalisation after 1999 and their increased participation in global value chains. Third, we decompose aggregate markups and show that the increase in markups, for both exporters and non‐exporters, is mainly driven by the within component rather than the reallocation effect. This suggests that all firms were increasing their markups, rather than high‐markup firms increasing their market share over time.