DP12044 Sales and Markup Dispersion: Theory and Empirics

Author(s): Monika Mrázová, J Peter Neary, Mathieu Parenti
Publication Date: May 2017
Keyword(s): CREMR Demands; Heterogeneous Firms; Kullback-Leibler Divergence; Log-Normal Distribution; Pareto Distribution.
JEL(s): F12, F15, F23
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12044

We derive exact conditions relating the distributions of firm productivity, sales, output, and markups to the form of demand; in particular, for a large family (including Pareto, lognormal, and Frechet), the distributions of productivity and sales are the same if and only if demand is "CREMR'' (Constant Revenue Elasticity of Marginal Revenue). We then use the Kullback-Leibler Divergence to quantify the information loss when a predicted distribution fails to match the actual one; empirically, to explain sales and markups distributions, the choice between Pareto and lognormal productivity distributions matters less than the choice between CREMR and other demands.