Market Concentration and Firm Markups: Micro Evidence from an Emerging Market with Inflationary Pressures

This paper presents a comprehensive panorama of the markup-setting behavior of Turkish non-financial firms from 2009 to 2022, using firm-level administrative datasets. The markup indicators, constructed following the methodology of De Loecker and Warzynski (2012), reveal an increasing trend in firm markups, particularly after recent inflationary shocks and deterioration in pricing behavior. The analysis indicates that higher markups are driven by large, foreign trade-oriented, and highly leveraged firms when the overall sample period is considered. Additionally, we observe significant sectoral heterogeneity in markup changes, indicating that sector-level factors play a crucial role in markup formation. We also conduct empirical analyses to examine the effect of sectoral competition on firm markups. Although the overall sample does not reveal a conclusive relationship, our estimations for the highinflation period (2020-2022) indicate a statistically significant co-existence between the deterioration of sectoral competition and increasing markups under excessive inflation. Our findings are evaluated with respect to alternative competition and markup definitions as well as certain robustness checks. We try to mitigate the potential endogeneity concerns with coarsened exact matching and instrumental variable analyses. Although the results remain intact under most cases, significance is susceptible to the inclusion of sector-specific trends. Our estimationsfor the high-inflation interval (post-2020)show that the association of market concentration and markups is only relevant for small firms, while the association is higher for firms that have a higher likelihood of receiving state subsidies. Regarding the social externalities, we find that increased markups during inflationary episodes lead to higher investment but lower labor expenses, with a rather limited economic significance.