Data and Markups: A Macro-Finance Perspective

What does market power look like in a data economy? We model data as fuel for prediction and study how it changes measured markups. Data has ambiguous effects on product markups: By reducing risk, it lowers markups. By prompting investment, it raises them. Its more distinctive effect is on aggregation. Better-informed firms shift production toward goods that have high realized profitability. This action-payoff covariance drives a wedge between product, firm, and industry markup measures. We show that this normalized covariance provides a lower bound on firms’ information. The calibrated model generates most of the observed level gap between cost-weighted and sales-weighted markups and can account for 82% of its 2010-2020 growth.