Markup Dispersion and Firm Entry: Evidence from Ethiopia

This paper examines whether and to what extent markups can influence structural transformation in a developing country by creating entry barriers. We exploit information from the Ethiopian annual census of manufacturing establishments to estimate markups and their dispersion at industry and woreda‐industry‐wide levels. We then analyse the relationship between markup dispersion and firm entry rates in local markets. Results show that higher markup dispersion significantly correlates with lower entry rates into a market, even in the presence of expected positive average markups. Specifically, an increase in dispersion from its median to the values at the 90th percentile of the distribution is related to a 4.2% point lower entry rate. This result is robust to different estimation methods as well as to different definitions of the key variables.