R&D, Innovation and Markups

Talk by Ana C. F. P. Soares (Imperial College of London) as part of the Research Seminar Series of the IOS Economics Department.

We examine how markups, output prices, marginal costs and productivity (TFPQ and TFPR) change when firms innovate after investing in R&D. We find that innovation raises markups, consistent with the appropriability hypothesis. Market shares also increase, in line with the superstar firm hypothesis. In contrast, efficiency measures such as TFPQ remain statistically unchanged. We interpret these effects as causal. At the aggregate level, this mechanism increases within-industry markup dispersion, suggesting greater misallocation, as predicted by some theoretical models.