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Energy, Inflation and Market Power: Excess Pass-Through in France

Author

Listed:
  • Axelle Arquie

    (CEPII)

  • Malte Thie

    (CEPII and Université Paris Dauphine)

Abstract

We explore how, in the French manufacturing sector, producer prices vary with market power during a severe episode of energy price hikes (between January 2020 and February 2023). Our work provides some empirical evidence in favor of a role for firms' market power in explaining inflation, and in favor of the "sellers' inflation" hypothesis (Weber and Wasner (2023)): in less competitive sectors, firms could use the energy price hike to increase their prices more than warranted by actual changes in costs. Using a rich dataset on French manufacturing firms' balance sheets, we first estimate markups at the firm-level, and aggregate them at the sectoral level. We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors. We show that, in sectors with higher markups, prices increase relatively more: in the least competitive sector, firms pass through up to 110% of the energy shock, implying an excess pass-through of 10 percentage points. In addition, we find that the association between markup and pass-through is even higher when markup dispersion is low, consistent with the argument that firms engage in price hikes when they expect their competitors to do the same.

Suggested Citation

  • Axelle Arquie & Malte Thie, 2023. "Energy, Inflation and Market Power: Excess Pass-Through in France," IMK Working Paper 220-2023, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:wpaper:220-2023
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_220_2023.pdf
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    Cited by:

    1. Etienne de L'Estoile & Mathilde Salin, 2024. "Who Takes the Land? Quantifying the Use of Built-Up Land by French Economic Sectors to Assess Their Vulnerability to the ‘No Net Land Take’ Policy," Working papers 941, Banque de France.
    2. Leonardo Ciambezi & Mattia Guerini & Mauro Napoletano & Andrea Roventini, 2023. "Accounting for the Multiple Sources of Inflation: an Agent-Based Model Investigation," GREDEG Working Papers 2023-14, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France, revised Jun 2024.

    More about this item

    Keywords

    Inflation; Markups;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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