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Markups and Marginal Costs Over the Firm Life: Implications for the Optimal Inflation Target

Author

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  • Klaus Adam
  • Tobias Renkin
  • Gabriel Züllig

Abstract

We estimate the dynamics of relative markups, marginal costs and prices over the firm life cycle using detailed firm data from Denmark. Relative marginal costs fall strongly over the first 15 years of firm life, but relative prices fall only weakly because of a strong rise in relative markups. Relative price trends thus underestimate trends in relative productivity. This distorts recent estimates of the optimal inflation target downward by 0.2-1.2% per year. We show that relative markups increase following the introduction of new products and the discontinuation of old products, suggesting that product turnover is important driver of markup dynamics at the firm level. Only about one third of the decrease in relative marginal cost over the firm age is explained by movements in relative productivity, with the remainder being due to non-homotheticities and increasing returns in the production function.

Suggested Citation

  • Klaus Adam & Tobias Renkin & Gabriel Züllig, 2025. "Markups and Marginal Costs Over the Firm Life: Implications for the Optimal Inflation Target," CRC TR 224 Discussion Paper Series crctr224_2025_626, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_626
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp626
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    More about this item

    Keywords

    relative markups; marginal costs; prices over the firm life; optimal inflation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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