Markup and Market Size: Evidence from Japan

This study empirically investigates how market size affects markups in the Japanese manufacturing sector. Recently developed models on monopolistic competition with endogenous price-cost markups show that markups in larger markets are lower because competition is stronger. This study proposes a new empirical approach to identify effective geographical range of market competition that affect markups in the tradable goods sector. The approach in this study is novel because market size is measured as the market potential within the threshold distance from 100 km until 1,000 km. This study finds both the size of market in closer proximity to the production location and the size of the distant market affect markups, suggesting that manufacturing establishments face stronger competition in geographically wider markets.