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The Hitchhiker’s Guide to Markup Estimation

Author

Listed:
  • Grassi, Basile
  • De Ridder, Maarten
  • Morzenti, Giovanni

Abstract

Is it feasible to estimate firm-level markups with commonly available datasets? Common methods to measure markups hinge on a production function estimation, but most datasets do not contain data on the quantity that firms produce. We use a tractable analytical framework, simulation from a quantitative model, and firm-level administrative production and pricing data to study the biases in markup estimates that may arise as a result. While the level of markup estimates from revenue data is biased, these estimates do correlate highly with true markups. They also display similar correlations with variables such as profitability and market share in our data. Finally, we show that imposing a Cobb-Douglas production function or simplifying the production function estimation may reduce the informativeness of markup estimates.

Suggested Citation

  • Grassi, Basile & De Ridder, Maarten & Morzenti, Giovanni, 2022. "The Hitchhiker’s Guide to Markup Estimation," CEPR Discussion Papers 17532, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17532
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    More about this item

    Keywords

    Macroeconomics; Competition; Markups; Production functions;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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