This paper investigates the cause of price differentials between domestic and overseas markets through various empirical analyses of markup pricing. The results show that markup ratios (defined as price/marginal cost) are generally higher in non-manufacturing sectors than in manufacturing ones. Particularly high markup ratios are estimated for such sectors as agriculture, forestry and fisheries and financing and insurance, both of which are said to be strictly regulated. The result suggests the possibility that the existence of regulations has distorted price structures. In addition, simultaneous estimation model consisting of cost and demand functions also rejects the hypothesis of perfect competition. On the other hand, the trend line of markup ratios over the past 20 years has remained almost flat for manufacturing industry, but, in contrast, has clearly declined for non-manufacturing industry reflecting the progress of deregulation.
Keywords: Markup Pricing; Market Power; Price Differentials
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.