Markups and markdowns

Mauro Caselli (1) , Stefano Schiavo (2) , Lionel Nesta (2)

1 UNITN - Università degli Studi di Trento
2 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

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.

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

Domains: Humanities and Social Sciences; Economics and Finance

Mauro Caselli, Stefano Schiavo, Lionel Nesta. Markups and markdowns. 2017. ⟨hal-03458822⟩