How Corporate Decisions Drive the Economy
We are accustomed to thinking that the fate of the economy depends on decisions made at the top: central banks, governments, fiscal policies. But sometimes the real drivers of economic cycles are found further down: in the daily choices of businesses, in their prices, in their profit margins.
This is the approach adopted by Basile Grassi, Assistant Professor in the Department of Economics and researcher at Bocconi’s Innocenzo Gasparini Institute for Economic Research (IGIER), together with Ariel Burstein (UCLA) and Vasco M. Carvalho (University of Cambridge). In their study “Bottom-Up Markup Fluctuations,” published in the Quarterly Journal of Economics, the authors overturn the traditional view regarding economic cycles.
The economy seen from below
Instead of starting with large aggregate figures such as GDP or inflation, the researchers look at what happens inside companies. Basile Grassi and his co-authors collected data on more than 400,000 French companies between 1994 and 2019, tracking the evolution of “mark-up” — i.e., the difference between the selling price and the cost of production — to understand how individual business strategies contribute to overall economic fluctuations.
Analysis of this huge database shows that companies’ profit margins do not all move in the same direction. “the markup of the average firm is ‘countercyclical’ with respect to own-sector output”, the authors write. In other words, when the economy is doing well, many small and medium-sized enterprises tend to reduce their margins to remain competitive, but the opposite is true for large companies.
“Firm-level markups are procyclical for large firms and countercyclical for small firms”. This means that, in times of economic expansion, giants are able to increase prices more than costs, thereby increasing profits, while smaller companies have to cut margins in order not to lose ground.
A domino effect that reaches GDP
These differences are not confined to company balance sheets. They are transmitted along value chains, amplified, and ultimately affect the entire economy. When a large producer changes its prices, the effect spreads to suppliers, distributors, and consumers, generating waves that can move the national economy in one direction or another. It is a “granular” economy, where the behavior of individual companies matters as much as global trends.
A lesson for economic policy
This bottom-up view has important implications for those tasked with designing industrial policies or regulations. If market concentration increases—that is, if a few large groups control entire sectors—the economy’s response to shocks also changes: it becomes more uneven and less predictable.
For Grassi and his co-authors, recognizing the role of companies in the dynamics of cycles is essential to understanding the resilience (or fragility) of a modern economy. In short, crises do not always arise from extraordinary events: sometimes they develop slowly, in the folds of the daily market.
“Our granular oligopolistic framework produces non-negligible aggregate fluctuations in output and markups”, the authors note — a sentence that sums up the core of their insight: large cycles often arise from tiny shocks, but ones that are distributed everywhere.
