The Lower Markup in Larger Cities?Agglomeration and Competition Effect

Zhao Ruili, Yin Xiangshuo, Sun Churen

The Journal of World Economy ›› 2019, Vol. 42 ›› Issue (4) : 149-173.

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PDF(2142 KB)
The Journal of World Economy ›› 2019, Vol. 42 ›› Issue (4) : 149-173.

The Lower Markup in Larger Cities?Agglomeration and Competition Effect

  • Zhao Ruili1, Yin Xiangshuo2, Sun Churen3
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Abstract

This paper investigates the agglomeration effect of larger cities on firm markup and their dispersion,following the approach proposed by the theoretical framework of Combes et al.(2012),and introducing urban size and agglomeration externality.The theoretical work shows that the agglomeration of larger cities presents a significantly negative influence on firms' average markup,and this effect is lower in high productivity firms.On the other hand,firm markup distribution is found to be lower in large cities,where they experience a more efficient reallocation of their resources.In order to examine these theoretical predications,matching data from the Chinese Annual Survey of Industrial Enterprises database and Chinese Urban Statistical Yearbook from 1998 to 2007 are used to empirically investigate the relationship between urban size and firm markup,resulting in the verification of these theoretical results.We also deconstruct the agglomeration,competition and selection effects on firm markup distribution in larger cities,finding that the agglomeration net effect is negative,resulting in a lower markup in larger cities.This indicates that agglomeration is an effective tool for improving consumer welfare and resource allocation efficiency.

Key words

urban size / agglomeration externality / firm markup

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Zhao Ruili, Yin Xiangshuo, Sun Churen. The Lower Markup in Larger Cities?Agglomeration and Competition Effect[J]. The Journal of World Economy, 2019, 42(4): 149-173

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