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Converging to Mediocrity: Trends in Firm-Level Markups in the United Kingdom 2008-2019

Executive summary

What is this research about?

  • The rapid advance of digital technologies is associated with a slowdown in the rate of productivity growth and an increase in average markups.
  • The UK productivity issue has been well-studied through sectoral and firm-level analyses.
  • The firm-level average markup has risen from 1.1 to 1.6 in the US due to the rise of superstar firms.
  • However, there are relatively few studies focusing on the UK.

What do the markup trends in UK manufacturing firms look like?

  • We rely on structural assumptions for demand, technology, and market structure to infer markups under quantity competition as a function of the demand-side elasticity of substitution and the firm’s revenue share in an industry.
  • We assume CES industry aggregates of quality-adjusted firm outputs nested within a Cobb-Douglas utility function for the representative consumer.
  • We also assume Cobb-Douglas production functions with heterogeneous Hicks-neutral technical efficiency.
  • However, we do not make assumptions about market structure and account for the fact that raising input must lower price given a downward-sloping demand curve when estimating industry elasticity of substitution (η).
  • We derive time-variant Cournot markups, as opposed to monopolistic time-invariant markups.
  • As an alternative method, we also employ the production approach for comparison purposes.

What have we found so far?

  • Using ONS ABS annual firm-level survey data for the period 2008-2019, we find that manufacturing markups fall by 5% under our structural framework, and this result is driven by a within-firm decline.
  • We find that manufacturing markups fall by 2% under the production approach, also driven by a within-firm decline.
  • These findings are consistent with the declining TFP trend found in Coyle et al. (2024).

 Authors: Diane Coyle, John McHale, Ioannis Bournakis, Jen-Chung Mei

Themes

  • Knowledge Capital

Published

02/07/2024

Cite

D. Coyle, J. McHale, I. Bournakis, J. Mei (2024) Converging to Mediocrity: Trends in Firm-Level Markups in the United Kingdom 2008-2019., Working Paper No. 047, The Productivity Institute.

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