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A Problem with Some Estimations and Interpretations of the Mark-up in Manufacturing Industry

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  • Jesus Felipe
  • J. S. L. McCombie

Abstract

This paper evaluates the methodological foundations of some recent attempts to estimate econometrically the degree of market power and the degree of returns to scale in manufacturing. The method discussed is based on estimating the aggregate production function in growth rate form. It is argued, following an argument made in another context by Phelps Brown, Shaikh & Simon, that as the data used in empirical analyses are in value terms (i.e. monetary values at constant prices), the parameter derived as a mark-up can be reinterpreted simply as a coefficient from the income accounting identity, which takes a value of unity subject to omitted variable bias. Thus, it cannot be unambiguously interpreted as a mark-up. It is also shown that the large estimates of the degree of increasing returns to scale are similarly flawed. The argument also has implications for understanding cyclical fluctuations of the Solow residual, which turns out to be largely the result of the procyclical fluctuations of the profit rate.We conclude by questioning whether the aggregate production function can ever be statistically tested or, in other words, whether it is capable of being refuted, as opposed to its parameters being merely estimated.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 16 (2002)
Issue (Month): 2 ()
Pages: 187-215

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Handle: RePEc:taf:irapec:v:16:y:2002:i:2:p:187-215

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References

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  1. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
  2. Eden, B. & Griliches, Z., 1991. "Prodoctivity, Market Power and Capacity Utilization when Spot Market Are Complete," Working Papers 91-06, University of Iowa, Department of Economics.
  3. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," NBER Working Papers 2115, National Bureau of Economic Research, Inc.
  4. Fisher, Franklin M, 1971. "Aggregate Production Functions and the Explanation of Wages: A Simulation Experiment," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 305-25, November.
  5. Basu, S. & Fernald, J.G., 1993. "Are Apparent Productive Spillovers a Figment of Specification Error," Papers 93-22, Michigan - Center for Research on Economic & Social Theory.
  6. Lucas, Robert E, Jr, 1970. "Capacity, Overtime, and Empirical Production Functions," American Economic Review, American Economic Association, vol. 60(2), pages 23-27, May.
  7. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October.
  8. Tatom, John A, 1980. "The "Problem" of Procyclical Real Wages and Productivity," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 385-94, April.
  9. Robert Barsky & Mark Bergen & Shantanu Dutta & Daniel Levy, 2001. "What Can the Price Gap between Branded and Private Label Products Tell Us about Markups?," NBER Working Papers 8426, National Bureau of Economic Research, Inc.
  10. Jesus Felipe & J. S. L. McCombie, 2003. "Some methodological problems with the neoclassical analysis of the East Asian miracle," Cambridge Journal of Economics, Oxford University Press, vol. 27(5), pages 695-721, September.
  11. Samuelson, Paul A, 1979. "Paul Douglas's Measurement of Production Functions and Marginal Productivities," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 923-39, October.
  12. Norrbin, S.C., 1993. "The Relation Between Price and Marginal Cost in U.S. Industry: A Contradiction," Working Papers 1993_05_04, Department of Economics, Florida State University.
  13. Jesus Felipe & Carsten Holz, 2001. "Why do Aggregate Production Functions Work? Fisher's simulations, Shaikh's identity and some new results," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 261-285.
  14. Solow, Robert M, 1974. "Law of Production and Laws of Algebra: The Humbug Production Function: A Comment," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 121, February.
  15. Jesus Felipe & J. S. L. McCombie, 2005. "How Sound are the Foundations of the Aggregate Production Function?," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 467-488, Summer.
  16. Shaikh, Anwar, 1974. "Laws of Production and Laws of Algebra: The Humbug Production Function," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 115-20, February.
  17. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
  18. Hall, Robert E., 1987. "Productivity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 421-444, January.
  19. Harcourt,G. C., 1972. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9780521096720, October.
  20. Simon, Herbert A, 1979. " On Parsimonious Explanations of Production Relations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(4), pages 459-74.
  21. J. S. L. McCombie, 2001. "What Does the Aggregate Production Function Show? Further Thoughts on Solow's "Second Thoughts on Growth Theory"," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 23(4), pages 589-615, July.
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Cited by:
  1. Mathä, Thomas Y. & Pierrard, Olivier, 2011. "Search in the product market and the real business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1172-1191, August.
  2. Angelo Reati, 2001. "Total factor productivity - a misleading concept," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(218), pages 313-332.
  3. Angelo Reati, 2001. "Total factor productivity - a misleading concept," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(218), pages 313-332.

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