This new paper by De Locker and Eeckhout will likely be classic: We document the evolution of markups based on firm-level data for the US economy since 1950. Initially, markups are stable, even slightly decreasing. In 1980, average markups start to rise from 18% above marginal cost to 67% now. .. Increase in average market power .. can account for .. slowdown in aggregate output. .. The rise in market power is consistent with seven secular trends in the last three decades.
"We show that over the last 15 years, the typical household has increasingly concentrated its spending on a few preferred products. However, this is not driven by “superstar” products capturing larger market shares. Instead, households increasingly focus spending on different products from each other. As a result, aggregate spending concentration has in fact decreased over this same period. We use a novel heterogeneous agent model to conclude that increasing product variety is a key driver of these divergent trends. When more products are available, households can select a subset better matched to their particular tastes, and this generates welfare gains not reflected in government statistics. Our model features heterogeneous markups because producers of popular products care more about maximizing profits from existing customers, while producers of less popular niche products care more about expanding their customer base. Surprisingly, however, our model can match the observed trends in household and aggregate concentration without any resulting change in aggregate market power."
1. The only market that matters is the labor market. Firms' market power was obtained by traditional political rent-seeking, not network effects.
2. If we assume that nearly all innovations are industry-specific, then increasing product variety (number of industries) will automatically lower productivity growth. To me that assumption is more tenable than assuming that firms are all selling a greater variety of goods. (Does your local HMO sell fish?)
I don't understand why we would expect markup percentages to be stable when more and more goods are produced offshore at lower costs. Say the wholesale cost of a t-shirt over time moves from $10 or $5, but the markup in $ remains almost constant -- this will look like an increase in markup (or, perhaps, as RobinHanson suggests, in fixed costs) while it is really a failure to decline.
I'm not saying this is the full effect, but it doesn't seem to be accounted for.
@RobinHanson: Sorry, I had assumed (perhaps incorrectly) that the US economy would have used a lot of that overseas labour pool in manufacturing outsourcing - for example, the manufacture of various products, such as say, general manufactured goods, cars or car components or clothing, or computer manufacture. And then the service side too - for example, the outsourcing of Helpdesks and IT outsourcing, etc.. Would that only affect a small fraction of US GDP? (I don't know.)
I'd say a good place to start is the average ideological rankings of Congress, if possible specifically on economic issues. As I assume you must know there has been a significant move to the right on economic policy in recent decades. Labor's influence is down, corporate influence is up, it's nothing too controversial.
All I'm really saying is that if "collusion got easier" would work as an explanation for a phenomenon you see in the real world, you should strongly consider it because collusion definitely has gotten easier as a result of a weaker and more laxly enforced regulatory regime. I suppose you'd actually expect that, since larger firms have more market power and thus both less need and more ability to collude under any regime.
No, the difference is important. Not growing because we now emphasize industries where growth is hard is quite different from growing productivity as much as before but not using that ability because we are instead making more kinds of products.
I have not read the paper, and am reluctant to pay $5 merely to read it, so any comment I might maker would be based on an ignorance of what might be in the paper.However, speaking as an accountant who has been involved in output costing analysis for both services and manufacturing industries - and their associated strategic marketing exercises - I would tend to take a skeptical view of papers that studied the history of product "markup" in an economy and which then attempted to draw conclusions from that.
The reason for my skepticism would be that "markup" - which is defined as "the amount added to the cost price of goods to cover overheads and profit" is not, per se, necessarily likely to be a statistically useful indicator of anything much - e.g., for estimating/"predicting" by an accountant or an econometrician.
Similarly, an examination of the historical ratio of fixed versus variable costs in total output costs is not necessarily likely to be of much use as a statistically significant predictor.
I could be wrong, of course, but one thing that does seem to be known is that, in western economies, whereas direct and indirect costs of manufacturing production in the '60s typically could be of the ratio of 80:20 (the typical Pareto ratio), they are nowadays more likely to be reversed and of the order 20:80. One explanation for this is that some main direct costs (e.g., typically labour) can be significantly reduced by labour-rate arbitrage through the use of manufacturing resources in second or third-world economies where labour-rates are extremely low relative to western economies.
Why lump all of U.S. industry together? It seems like the Health, Education and the Legal industries have been doing pretty much the same thing for years, but at steadily increasing expense. Doesn't that negative productivity growth weigh down the overall average? Aren't these industries big enough to have an effect?
Perhaps it's not a matter of "our" getting richer (is the population really much better off than in the 80s, and why didn't we see these effects earlier if they result from greater social wealth) as much as increasing economic inequality causing an increasingly greater orientation of consumer production to the affluent. (Not much "variety" for the poor, who shop at WalMart.)
"We show that over the last 15 years, the typical household has increasingly concentrated its spending on a few preferred products. However, this is not driven by “superstar” products capturing larger market shares. Instead, households increasingly focus spending on different products from each other. As a result, aggregate spending concentration has in fact decreased over this same period. We use a novel heterogeneous agent model to conclude that increasing product variety is a key driver of these divergent trends. When more products are available, households can select a subset better matched to their particular tastes, and this generates welfare gains not reflected in government statistics. Our model features heterogeneous markups because producers of popular products care more about maximizing profits from existing customers, while producers of less popular niche products care more about expanding their customer base. Surprisingly, however, our model can match the observed trends in household and aggregate concentration without any resulting change in aggregate market power."
https://www.nber.org/papers...
1. The only market that matters is the labor market. Firms' market power was obtained by traditional political rent-seeking, not network effects.
2. If we assume that nearly all innovations are industry-specific, then increasing product variety (number of industries) will automatically lower productivity growth. To me that assumption is more tenable than assuming that firms are all selling a greater variety of goods. (Does your local HMO sell fish?)
Cournot competition: Max_q1 q1*(P(q1,q2, ..)-c(q1)).
Robin, What is “quantity competition?"
I don't understand why we would expect markup percentages to be stable when more and more goods are produced offshore at lower costs. Say the wholesale cost of a t-shirt over time moves from $10 or $5, but the markup in $ remains almost constant -- this will look like an increase in markup (or, perhaps, as RobinHanson suggests, in fixed costs) while it is really a failure to decline.
I'm not saying this is the full effect, but it doesn't seem to be accounted for.
"Premium Mediocre" seems like a suitable term to describe this increased taste for variety at low cost:https://www.ribbonfarm.com/...
@RobinHanson: Sorry, I had assumed (perhaps incorrectly) that the US economy would have used a lot of that overseas labour pool in manufacturing outsourcing - for example, the manufacture of various products, such as say, general manufactured goods, cars or car components or clothing, or computer manufacture. And then the service side too - for example, the outsourcing of Helpdesks and IT outsourcing, etc.. Would that only affect a small fraction of US GDP? (I don't know.)
@gwern: Thanks for that tip! I shall try it.
> I have not read the paper, and am reluctant to pay $5 merely to read it
Use Libgen.
I'd say a good place to start is the average ideological rankings of Congress, if possible specifically on economic issues. As I assume you must know there has been a significant move to the right on economic policy in recent decades. Labor's influence is down, corporate influence is up, it's nothing too controversial.
All I'm really saying is that if "collusion got easier" would work as an explanation for a phenomenon you see in the real world, you should strongly consider it because collusion definitely has gotten easier as a result of a weaker and more laxly enforced regulatory regime. I suppose you'd actually expect that, since larger firms have more market power and thus both less need and more ability to collude under any regime.
No, the difference is important. Not growing because we now emphasize industries where growth is hard is quite different from growing productivity as much as before but not using that ability because we are instead making more kinds of products.
The paper doesn't lump industries together, but does separate analyses for different industries, and even varies the detail with which it does that.
The fraction of US firms which are relying on substantial fractions of foreign workers is pretty small.
I have not read the paper, and am reluctant to pay $5 merely to read it, so any comment I might maker would be based on an ignorance of what might be in the paper.However, speaking as an accountant who has been involved in output costing analysis for both services and manufacturing industries - and their associated strategic marketing exercises - I would tend to take a skeptical view of papers that studied the history of product "markup" in an economy and which then attempted to draw conclusions from that.
The reason for my skepticism would be that "markup" - which is defined as "the amount added to the cost price of goods to cover overheads and profit" is not, per se, necessarily likely to be a statistically useful indicator of anything much - e.g., for estimating/"predicting" by an accountant or an econometrician.
Similarly, an examination of the historical ratio of fixed versus variable costs in total output costs is not necessarily likely to be of much use as a statistically significant predictor.
I could be wrong, of course, but one thing that does seem to be known is that, in western economies, whereas direct and indirect costs of manufacturing production in the '60s typically could be of the ratio of 80:20 (the typical Pareto ratio), they are nowadays more likely to be reversed and of the order 20:80. One explanation for this is that some main direct costs (e.g., typically labour) can be significantly reduced by labour-rate arbitrage through the use of manufacturing resources in second or third-world economies where labour-rates are extremely low relative to western economies.
Why lump all of U.S. industry together? It seems like the Health, Education and the Legal industries have been doing pretty much the same thing for years, but at steadily increasing expense. Doesn't that negative productivity growth weigh down the overall average? Aren't these industries big enough to have an effect?
Perhaps it's not a matter of "our" getting richer (is the population really much better off than in the 80s, and why didn't we see these effects earlier if they result from greater social wealth) as much as increasing economic inequality causing an increasingly greater orientation of consumer production to the affluent. (Not much "variety" for the poor, who shop at WalMart.)