Markups are price premiums measured as the ratio between the price of a product and its marginal cost, i.e. the cost of producing an additional unit. The price of a product or service is therefore determined by the markup on marginal costs. If a company sets high markups, this can be interpreted as a sign of its market power and of low competitive pressure in the industry. In Germany, the price markups in the overall economy are around 20 per cent. They increased by almost ten percentage points between 2002 and 2016. However, there are considerable differences between the individual sectors. While the average price markups of the manufacturing sector are close to the overall average, they are lower for energy and water suppliers as well as in trade. On the other hand, the construction industry and individual services – especially information and communication as well as transport – are clearly above this average.
However, not all sectors are equally relevant for consumers. Therefore, it makes sense to adjust the calculation of average markups and weigh the individual sectors according to their importance for consumers. As part of the study, information on consumer behaviour was used to determine the relevance of each sector for consumers: Which sectors produce the goods and services that consumers actually demand? The result of this consumption weighting are so-called consumer price markups. The most important economic sectors for consumers, measured by their consumption weight, are trade, real estate, healthcare and social services, other economic services, energy supply and the hotel and restaurant industry. The manufacturing industry, on the other hand, is of great importance to the economy as a whole, but plays a small role for consumers.
According to the results of the study, consumers in Germany are exposed to higher price markups than the economy as a whole. “This is due to economic sectors with high average price markups, whose consumption weight is significantly greater than that of the overall economic average. They play a major role for consumers in their daily lives; one example is real estate and housing,” says ZEW researcher and co-author of the study, Bernhard Ganglmair.
People with low household income more strongly affected
The ZEW researchers also investigated whether the level of household income plays a role in the severity of the burden consumers have to bear due to the increased market power of companies. In doing so, they used the same three types of households as the Federal Statistical Office in its price index for the standard of living published until 2002: higher-income, medium-income and low-income households.
They show that low-income households are exposed to higher price markups than medium- and higher-income households. “Low-income strata of the population are more strongly affected by the development of rising price markups and greater business concentration than well-off strata. This also leads to the conclusion that these very market developments could play a role in the increasing social and economic inequality. Policymakers and economic research are equally called upon to take action in this regard,” says Ganglmair.