Digital transformation has become an important path for the high quality development of firms. By using the data of listed companies and customs data from 2007 to 2016, and on the basis of the theoretical framework of M-O model, through the introduction of digital transformation, this paper makes an investigation of the micro effects and mechanism of digital transformation on the firms’markups. The results show that the impact of digital transformation on the firms’markups depends on the net effect of productivity, cost changes and competition. As a result, digital transformation significantly reduces the firms’markups. Mechanism analysis shows that the input costs effect and competition effect of digital transformation is an important channel. The heterogeneity analysis shows that the negative impact of digital transformation on the firms’markups is larger for firms in the non-stateowned firms, medium and low productivity firms and medium and low financing constrained firms. The study also finds that the export tendency inhibited the negative impact of digital transformation on the firms’markups. The results would contribute to policy decision-making on promoting the deep integration between digital economy and real economy,which eventually boosts the digital transformation.On the one hand, high-quality digital transformation of enterprises should be encouraged, and on the other hand, full play s hould be given to the important role of digital transformation in promoting Chinese high-quality exports.