Markups – the amount added to the cost of a good to determine its selling price – are a key macroeconomic variable. Among other purposes, markups can be used to determine firms’ profitability and market power. However, the financial datasets most often relied on by economists lack direct information about prices and, by extension, markups. A large range of macroeconomic studies must, therefore, rely on markup estimates derived from such financial data, even though a careful and quantitative assessment of the accuracy of firm-level markup estimates from financial data has not been available.
An article published in the journal Econometrica fills this gap by assessing the degree to which markups can be recovered from data in financial statements. The authors, including Analysis Group Associate Giovanni Morzenti, use an analytical framework, simulations of a quantitative macroeconomic model, and empirical analyses based on real-world data from French firms. The study concludes that financial data can be valuable for understanding how markups change and differ, but that researchers should be cautious when using it to determine overall average markups if price information is not available.