DP13146 | Prices under Innovation: Evidence from Manufacturing Firms

Publication Date

08/30/2018

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Abstract

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.