DP13146 Prices under Innovation: Evidence from Manufacturing Firms
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 up, 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.