Chinese firm markup behavior

This paper empirically investigates the relationship among markup, productivity, and factors affecting market structure, using the Chinese plant-level census  and trade data for the period of 2000-2006. We use a new empirical framework developed by De Loecker and Warzynski (2012), which measures firm-specific markup and productivity, and analyzes the impact of export status on markup. We study how markups behave with respect to firm ownership, size, as well as trade regime. We find that firms that charge higher markups tend to be of foreign ownership, have large export market share, and also conduct ordinary trade. 

We further revisit the claims of the Structure-Conduct-Performance (SCP) literature. Their empirical frameworks has been criticized on methodological issues such as measurement error and endogeneity problems among independent variables.  Also, many industrial organization economists have raised theoretical issues such as causality problems among factors in industry structure, conduct of firms, and performance of firms.  However, as more micro-level firm data are available in recent years we can reevaluate some of the claims from the SCP literature. In the SCP paradigm, industry structure determines conduct of firms, which, in turn, determines market performance. For example, seller concentration (structure) affects firm pricing (conduct), which, in turn, determines price markup (performance).  However, both seller concentration and price markup are determined endogenously; high price markup can affect seller concentration and vice versa.

We test a series of interesting hypotheses from the SCP literature: 1) Seller concentration is positively related to markup; 2) High degree of product differentiation can increase market power of firms, which results in high markup; and 3) Level of economies of scale is related to markup.