Globalisation and the fall of markups

Abstract

This paper provides the evidence of a fall of markups of price over marginal costs in Poland over the period 2002–2016. Markups were calculated using a census of firms and the methodology proposed by De Loecker and Warzynski (2012; American Economic Review, 102(6)). The fall of markups is robust to several empirical identification strategies. Moreover, the decline of markups is not related to changes in a sectoral composition and firms demography and is most severe in exporting firms. Our empirical results relate the fall of markups to the globalisation and the emergence of the Global Value Chains. We show that an increasing reliance on imported components in production, together with a rising concentration of domestic firms on export markets are the main factors behind the observed compression of markups. We also document a hump-shaped (U-shaped) relationship between foreign value added in exports (distance from final demand) and markups.