Highlights :

• We first estimate firm-level markups, applying the methodology from De Loecker et al. (2012) on French manufacturing firms balance sheet data, and aggregate them at the sectoral level.
• We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors.
• We show that in the least competitive sector, firms pass through up to 115% of the energy shock.

 Abstract :
We explore how, in the French manufacturing sector, producer prices vary with market power during a severe episode of energy price hikes (between January 2020 and December 2022). Our work provides micro-level empirical evidence in favor of a role for firms' market power in explaining inflation. Using a rich dataset on French manufacturing firms' balance sheets, we first estimate markups at the firm-level, and aggregate them at the sectoral level. We then study the response of the producer price index (PPI) to a change in spot energy prices, depending on average market power within sectors. We show that in sectors with higher markups, prices increase relatively more: in the least competitive sector, firms pass through over 115% of the energy shock, implying an excess pass-through of more than 15 percentage points. In addition, we analyze in greater detail the mechanisms that might be behind our results: we discard the possibility that the pricing behavior might be driven by a "liquidity buffer rationale", implying that the excess pass-through we identify is detrimental to consumers.

Updated on October 26th 2023

 Keywords : Inflation | Markups

 JEL : E31, F4, L11