Multinationals, Markets, and Markups * Wolfgang Keller Stephen R. Yeaple Colorado, NBER, and CEPR Penn State and NBER June 24, 2020 Abstract Over the last several decades there is increasing concern whether the concentration of economic activity in a small number of large firms has meant an increase in firm market power. While on the one hand technical and legal barriers to entry may have increased the ability of incumbent firms to raise mark-ups without fear of entry, on the other hand the growing concentration may have more benign causes such as technological change that favors greater scale of operations. This paper studies global market power by analyzing activities of U.S. multinational firms through the lens of a model in which firms tailor their mark-up to the local degree of competition. Employing data on virtually all US-owned firms operating across 50 countries for the years 1999 to 2014, we first show that the market power of manufacturing firms has risen substantially, and mostly due to higher mark-ups firm-by-firm: market share reallocation playing a minor role. Second, we confirm the model’s predictions that while high-productivity firms generally charge high mark-ups, they prefer to enter markets where a high degree of competition keeps mark-ups relatively low. Weaker firms, in contrast, tend to enter markets in which competition is low. This sorting implies that the average mark-up differences across locations taken at face value understate differences in the extent of competition across countries. Third, we show that the importance of firm sorting to countries has increased over time. The analysis highlights the importance of the firm- market dimension when studying market power. * The statistical analysis of firm-level data on U.S. multinational corporations reported in this study was conducted at U.S. Bureau of Economic Analysis under arrangements that maintained legal confidentiality requirements. Views expressed are those of the authors and do not necessarily reflect those of the Bureau of Economic Analysis. Support from the National Science Foundation under grant SMA 1360207 is gratefully acknowledged. Email: wolfgang.keller@colorado.edu, sryeaple@gmail.com 1