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The Effects of Local Demand and Supply Restrictions on Markup

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Abstract

We investigate the causal effects on markup of a contraction in demand and supply. For differentiated manufacturing products, transport and business services, markups shrink severely following a contraction in demand whereas they amplify after a contraction in supply. In either case the effect is short-lived. For local firms operating in retail, wholesale, restaurant, and accommodation, a supply contraction determines a boost in markups that lasts a few years; a demand contraction instead drives down the labor costs without affecting the markups. We also find heterogeneous effects among firms caused by the supply shock, as firms with the lowest markups already tend to increase more the markup while highest markup firms mainly gain in terms of market shares. Overall, after a deep shock like the Covid-19 one our findings suggest significant labor market adjustment in sectors with substitutable workers and enhanced output market concentration.

Suggested Citation

  • Antonio Acconcia & Elisa Scarinzi, 2022. "The Effects of Local Demand and Supply Restrictions on Markup," CSEF Working Papers 635, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 17 Mar 2022.
    • Handle: RePEc:sef:csefwp:635
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    More about this item

    Keywords

    Demand/Supply Contraction; Markup; Local Competition; Labor Market; Demand Reallocation.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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