DP16156 Monopolistic price setting behavior of IT firms

Author(s): Coen N Teulings, Ellen Van 't Klooster
Publication Date: May 2021
Keyword(s): Information Technology, market power, markup
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16156

De Loecker et al. (2020) have shown that markups of publicly traded firms have risen since 1980 in the US. They find that this rise cannot be attributed to a particular sector. Using the same data, this paper shows that the increase in markup is concentrated among IT firms. Firms can be classified as IT or non-IT based on industry codes, but this method ignores a number of IT firms outside specific IT industries, e.g. Amazon and Uber. We develop an alternative, firm-level classification method, by applying natural language processing (NLP) to the description of firms' activities in Compustat. After classifying firms as IT and non-IT, we show that markups in the period since 1980 fall apart in two episodes. In the first, from 1980 until 1996, non-IT firms recovered from the fall of markups in the seventies. In the second episode, since 1996, markups of IT firms exploded from 46% in 1996 to 94% in 2017, while the markup of non-IT firms was largely stagnant.