Price Markups: average consumption markup by percentile in the UK from 1997 to 2019

A price markup is the difference between the price a good or service is sold at and the cost of producing the product for the company which produces it. In theory, perfectly competitive markets should prevent firms from charging prices above the marginal cost of what it takes to produce the good or service being sold, meaning markups would not exist. In reality, due to market imperfections, firms are able to wield a certain measure of market power which allows them to add markups to the price which they charge consumers. Sources of market power may include brand loyalty from consumers, barriers to entry into the market, or a lack of competitors, among others.

Markups and market power

Between 1998 and 2019, the average price markup for intermediate consumption goods, that is goods used or consumed in the production process, was approximately 11 percent in the United Kingdom. This rise in average markups was largely driven by the firms with the greatest market power who were in the 90^th percentile for markups. The ratio of these companies' markups to the median companies' markups (50^th percentile), increased from around 1.5 in 1997 to over 1.75 in 2019. While for the firm in the middle of the markup distribution (50^th percentile) their average markup increased by 5.9 percent over this period, the markup for firms in the top 10 percent of the distribution (90^th percentile) rose by 21 percent. This rise in the ability of businesses at the top of the markup distribution to charge more than the median company likely reflects growing market power and dominance among a smaller number of large companies.