Mergers and Markups

Recent evidence on the rise in markups has attracted considerable attention on potential causes and explanations. In a decomposition exercise, De Loecker et al. (2020) find that a large portion of the economy-wide increase in aggregate markups is due to the reallocation term: larger growth of the higher markup firms relative to the average. We revisit this finding and evaluate how much of the firm size increase is due to internal growth and how much is due to acquiring other companies through mergers and acquisitions. Utilizing a comprehensive dataset of M&A activity over the last 40 years, we find that 60 percent of the reallocation term and 38 percent of the overall markup increase is due to merger activities. The merger and acquisition effect on markups grows considerably after 1999, coinciding with aggregate patterns of M&A activities. Manufacturing and information industries account for the large portion of the aggregate pattern. We further document that the merger activities also impact acquirer markups