Malte Thie

The implications of increases in firm-level markups across a wide range of countries have been gaining a lot of attention in the literature. This paper tries to shed light on a potential underlying cause for these increases: trade in intermediates. I first develop a partial-equilibrium Melitz-type model of importing under monopolistic competition with non-CES preferences. The model introduces three margins of adjustment to a shock in intermediate import prices: (i) importing firms experience increases in markups, (ii) non- importing firms need to contract markups to stay competitive and (iii) more firms select into importing. Using confidential product-level data on French firms, I then test these margins of adjustment econometrically. To test the model’s predictions, I employ an IV shift-share strategy and introduce a novel strategy to test the extensive margin, relying on the identification of the (partial) product-level input-output matrix from single-product firms. Results show that all three margins of adjustment can be identified in the data and are quantitatively sizeable. Importers pass-through only around 60% of changes in foreign marginal costs into their final good prices, the rest constituting a change in markups. Further, following a 10% increase in the price index, firms increase their price by 3.5%. Finally, import price changes induce more firms to import, a result that has been overlooked in this context. A 65% decrease in the import price index, increases the share of importers for a given input by 43%.

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.