Prices, Profits, and Power: An Analysis of 2021 Firm-Level Markups

This research brief is the first to explore the size and distribution of markups (essentially the difference between sales and marginal costs) and profit margins across 3,698 firms operating in the US in 2021, reproducing and updating the analysis of Jan De Loecker, Jan Eeckhout, and Gabriel Unger’s The Rise of Market Power and the Macroeconomic Implications. Konczal and Lusiani’s analysis is evidence that the recent sudden high jump in markups fits all three of the main explanatory stories of inflation being debated—namely those related to changes in demand, supply, and market power. Notably, they find that:

• Markups and profits skyrocketed in 2021 to their highest recorded level since the 1950s. Further, firms in the US increased their markups and profits in 2021 at the fastest annual pace since 1955.
• There are broad markup increases across many types and sizes of firms, suggesting the influence of demand, and a historically unique movement of markups between industries, suggesting a supply story.
• Adjusting for size, pre-pandemic markups are a strong predictor of the increase in markups during 2021, suggesting a role for market power as an explanatory driver of inflation. A 10 percent higher level of size-adjusted markups before the pandemic is associated with an increase between 1.6 and 2.7 percent in 2021.

Since markups are unusually and suddenly so high, there is room for reversing them with little economic harm and likely societal benefit, including lower prices in the short term and less inequality and more innovation in the medium term.