Inflation, Market Structure and Markup in Indian Manufacturing Industries

Previous empirical studies in countries other than India have found both positive as well as negative relationship between inflation and markup. However, such studies primarily consider the effect of aggregate inflation but have not explicitly investigated the effect of cost inflation on markup. In the absence of such a study the present paper, using firm level panel data from the manufacturing industries in India over the period 1995–1996 to 2008–2009, investigates whether and what kinds of effect does the cost inflation have on firm's markup. Further, the analysis is extended to investigate whether such a relationship between inflation and markup is shaped by output market structure of industries. Although we find mixed results i.e. there is negative as well as positive effects of cost inflation on markup in different industries, whereas in some of the industries there is no significant effect, such a relationship is very much shaped by output market structure in many of the manufacturing industries thereby highlighting the role of competition in influencing the functional distribution of income.