Mark-up and Cost Dispersion across Firms: Direct Evidence from Producer Surveys in Pakistan

Thursday, 8 June, 2017
Abstract: 
In this short paper, published in the American Economic Review, Atkin, Chaudhry, Chaudry, Khandelwal and Verhoogen (2015) directly asked firms about their mark-ups. Since 2011, they have been studying a cluster of soccer-ball manufacturers located in Sialkot, Pakistan and have learned a great deal about the ins and outs of producing soccer balls. In Atkin et al. (2014), the authors study the adoption of a new cost-saving technology that they invented and randomly introduced to a subset of firms. In conjunction with that study, they have directly collected information on prices and profitability, as well as the unit costs of manufacturing a standardized ball. Asking firms directly about their mark-ups is not a guarantee of accurate information. However, the facts that the producers use similar production techniques that the authors understand well and that they have been able to build up a modicum of trust with the firms over the course of our several-year project give them confidence that there is signal in the self-reported mark-ups. They have six main findings. First, dispersion in mark-ups is greater than dispersion in costs, at least in proportional terms. Second, both costs and mark-ups are positively related to firm size, arguably the best observable proxy for the entrepreneurial-ability parameter in many heterogeneous firm models (e.g. the”Melitz draw"). Third, the elasticity of mark-ups with respect to firm size is significantly greater than the elasticity of costs. Fourth, larger firms have greater costs primarily because they use higher-quality inputs (which are costly). Fifth, larger firms charge higher mark-ups on average both because they produce a greater share of higher-quality ball types, which carry higher mark-ups, and because they charge higher mark-ups for a given type of ball. Sixth, there is suggestive evidence that marketing efforts may play an important role is generating higher average mark-ups: mark-ups are more highly correlated with whether an entrepreneur attends an annual trade expo and sells to richer countries than with available measures of technical efficiency. In the conclusion the authors discuss what they consider to be the main implications of these findings for the theoretical and empirical work on heterogeneous firms.