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Profiting From Innovation: Firm Level Evidence on Markups

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Abstract
While innovation is argued to create value, private incentives of firms to innovate are driven by what part of the value created firms can appropriate. In this paper we explore the relation between innovation and the markups a firm is able to extract after innovating. We estimate firm-specific price-cost margins from production data and find that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the firm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the firm's patenting and promotion behavior, the age of the firm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the firm's markup.

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  • Cassiman, Bruno & Vanormelingen, Stijn, 2013. "Profiting From Innovation: Firm Level Evidence on Markups," IESE Research Papers D/1079, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-1079
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    2. Koen Tackx & Sandra Rothenberger & Paul Verdin, 2015. "Is Advertising for Losers? An Empirical Study from a Value Creation– Value Capturing Perspective," Working Papers CEB 15-034, ULB -- Universite Libre de Bruxelles.
    3. Cristina Fernández & Aitor Lacuesta & José Manuel Montero & Alberto Urtasun, 2015. "Heterogeneity of markups at the firm level and changes during the great recession: the case of spain," Working Papers 1536, Banco de España.
    4. Malamud, Semyon & Zucchi, Francesca, 2015. "Liquidity, Innovation, and Endogenous Growth," CEPR Discussion Papers 10840, C.E.P.R. Discussion Papers.
    5. Shen, Guobing & Shen, Binchao & Wu, Ruochen & Yuan, Zhengyu, 2023. "Internetization and the markups of export firms: Evidence from China," Economic Modelling, Elsevier, vol. 120(C).
    6. Bin-Tzong Chie & Shu-Heng Chen, 2014. "Competition in a New Industrial Economy: Toward an Agent-Based Economic Model of Modularity," Administrative Sciences, MDPI, vol. 4(3), pages 1-27, July.
    7. Tackx, Koen & Rothenberger, Sandra & Verdin, Paul, 2017. "Is advertising for losers? An empirical study from a value creation and value capturing perspective," European Management Journal, Elsevier, vol. 35(3), pages 327-335.
    8. Emannuel Dhyne & Joep Konings & Joep Konings & Stijn Vanormelingen,, 2018. "IT and productivity: A firm level analysis," Working Paper Research 346, National Bank of Belgium.
    9. Kaku Attah Damoah & Giorgia Giovannetti & Marco Sanfilippo, 2021. "Markup Dispersion and Firm Entry: Evidence from Ethiopia," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(2), pages 299-327, April.
    10. Malamud, Semyon & Zucchi, Francesca, 2016. "Liquidity, innovation, and endogenous growth," Working Paper Series 1919, European Central Bank.
    11. Joze Damijan & Jozef Konings & Aigerim Yergabulova, 2020. "Increasing market power in Slovenia: Role of diverging trends between exporters and non‐exporters," The World Economy, Wiley Blackwell, vol. 43(5), pages 1327-1345, May.
    12. Sabien Dobbelaere & Mark Vancauteren, 2014. "Market imperfections, skills and total factor productivity : Firm-level evidence on Belgium and the Netherlands," Working Paper Research 267, National Bank of Belgium.
    13. Irene Brambilla & Darío Tortarolo, 2014. "An Empirical Analysis of Mark-ups in the Argentine Manufacturing Sector," IIE, Working Papers 104, IIE, Universidad Nacional de La Plata.
    14. Montero, José Manuel & Urtasun, Alberto, 2021. "Markup dynamics and financial frictions: The Spanish case," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 316-341.
    15. Jordi Jaumandreu & Shuheng Lin, 2018. "Prices under Innovation: Evidence from Manufacturing Firms," Working Papers 2019-07-04, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    16. Konings, Jozef & Dhyne, Emmanuel & Van den bosch, Jeroen & ,, 2018. "The Return on Information Technology: Who Benefits Most?," CEPR Discussion Papers 13246, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Innovation; markups; value;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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