DP13146 Prices under Innovation: Evidence from Manufacturing Firms

Author(s):	Jordi Jaumandreu, Shuheng Lin
Publication Date:	August 2018
Keyword(s):	Innovation, marginal cost, markup, price indices
JEL(s):	D43, L11, L16, O31
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13146

We study how firms' innovations impact prices with endogenous productivity and markup, under imperfect competition and dynamic pricing. Absent innovation, productivity plus markup changes curb price growth to half of variable inputs cost growth. Innovation's additional impact on costs is negatively correlated with markup changes. We detect two prevalent strategies. When marginal cost goes down, firms cash-in innovation by increasing the markups to enlarge profits. When marginal cost goes u firms practice countervailing pricing by decreasing markups. With no innovation aggregate manufacturing price growth had multiplied by 1.4, but innovation without cash-in strategies had multiplied it by 0.8.