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Firms’ Price Markups and Returns to Scale in Imperfect Markets - Bulgaria and Hungary

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Author Info

  • Rumen Dobrinsky

    ()
    (UN Economic Commission for Europe, Palais des Nations, Geneva)

  • Gabor Korosi

    ()
    (Institute of Economics Hungarian Academy of Sciences)

  • Nikolay Markov

    ()
    (Centre for Economic and Strategic Research, Bulgaria)

  • Laszlo Halpern

    ()
    (Institute of Economics Hungarian Academy of Sciences)

Abstract

Under perfect competition and constant returns to scale, firms producing homogeneous products set their prices at their marginal costs which also equal their average costs. However, the departure from these standard assumptions has important implications with respects to the derived theoretical results and the validity of the related empirical analysis. In particular, monopolistic firms will charge a markup over their marginal costs. We show that firms' markups tend to be directly associated with the employed production technology, more specifically with their returns to scale. Accordingly, we analyze the implications for the markup ratios from the incidence of non-constant returns to scale. We present quantitative results illustrating the effect of the returns to scale index on the firms' price markups, as well as the relationship between the two indicators, on the basis of firm-level data for Bulgarian and Hungarian manufacturing firms.

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Bibliographic Info

Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0412.

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Length: 35 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:has:discpr:0412

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Keywords: markup pricing; market imperfections; return to scale; Bulgaria; Hungary;

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References

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  1. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  2. Roeger, Werner, 1995. "Can Imperfect Competition Explain the Difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 316-30, April.
  3. Wu, Yangru & Zhang, Junxi, 2000. "Endogenous markups and the effects of income taxation:: Theory and evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 77(3), pages 383-406, September.
  4. Matthew D. Shapiro, 1987. "Measuring Market Power in U.S. Industry," NBER Working Papers 2212, National Bureau of Economic Research, Inc.
  5. Hoekman, Bernard & Kee, Hiau Looi & Olarreaga, Marcelo, 2001. "Mark-ups, Entry Regulation and Trade: Does Country Size Matter?," CEPR Discussion Papers 2853, C.E.P.R. Discussion Papers.
  6. Harry Bloch & Michael Olive, 2001. "Pricing over the Cycle," Review of Industrial Organization, Springer, vol. 19(1), pages 99-108, August.
  7. Rumen Dobrinsky & Boyko Nikolov & Nikolay Markov, 2001. "Mark-Up Pricing in Bulgarian Manufacturing," William Davidson Institute Working Papers Series 389, William Davidson Institute at the University of Michigan.
  8. Norrbin, Stefan C, 1993. "The Relation between Price and Marginal Cost in U.S. Industry: A Contradiction," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1149-64, December.
  9. Morrison, Catherine J, 1992. "Markups in U.S. and Japanese Manufacturing: A Short-Run Econometric Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 51-63, January.
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  11. Justman, Moshe, 1987. "An Extension of Lerner's Monopoly Index for Markets with a Disparity between Long- and Short-run Demand Elasticities," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 681-94, October.
  12. 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.
  13. Laszlo Halpern & Gabor Korost, 2001. "Mark-ups in the Hungarian Corporate Sector," William Davidson Institute Working Papers Series 411, William Davidson Institute at the University of Michigan.
  14. Roberts, Mark J. & Supina, Dylan, 1996. "Output price, markups, and producer size," European Economic Review, Elsevier, vol. 40(3-5), pages 909-921, April.
  15. Jozef Konings & Patrick Van Cayseele & Frederic Warzynski, 2003. "The Effects Of Privatization And International Competitive Pressure On Firms’ Price-Cost Margins: Micro Evidence From Emerging Economies1," William Davidson Institute Working Papers Series 2003-603, William Davidson Institute at the University of Michigan.
  16. Jozef Konings & Patrick Van Cayseele & Frederic Warzynski, 1999. "The Dynamics of Industrial Markups in Two Small Open Economies: Does National Competition Policy Matter ?," Center for Economic Studies - Discussion papers ces9914, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  17. Mark J. Roberts & Dylan Supina, 1997. "Output Price and Markup Dispersion in Micro Data: The Roles of Producer Heterogeneity and Noise," NBER Working Papers 6075, National Bureau of Economic Research, Inc.
  18. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," NBER Working Papers 2115, National Bureau of Economic Research, Inc.
  19. Kee, Hiau Looi, 2002. "Markups, returns to scale, and productivity : a case study of Singapore's manufacturing sector," Policy Research Working Paper Series 2857, The World Bank.
  20. Joaquim Oliveira Martins & Stefano Scarpetta & Dirk Pilat, 1996. "Mark-Up Ratios in Manufacturing Industries: Estimates for 14 OECD Countries," OECD Economics Department Working Papers 162, OECD Publishing.
  21. Joaquim Oliveira Martins & Stefano Scarpetta, 1999. "The Levels and Cyclical Behaviour of Mark-ups Across Countries and Market Structures," OECD Economics Department Working Papers 213, OECD Publishing.
  22. Ludger Linnemann, 1999. "Sectoral and aggregate estimates of the cyclical behavior of markups: Evidence from Germany," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(3), pages 480-500, September.
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Citations

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Cited by:
  1. Alexandra Ferreira Lopes, 2007. "The Costs of EMU for Transition Countries," Money Macro and Finance (MMF) Research Group Conference 2006 2, Money Macro and Finance Research Group.
  2. Anthony Rezitis & Maria Kalantzi, 2011. "Investigating Market Structure of the Greek Manufacturing Industry: A Hall-Roeger Approach," Atlantic Economic Journal, International Atlantic Economic Society, vol. 39(4), pages 383-400, December.
  3. Lubomir Lizal & Kamil Galuščák, 2012. "The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation," William Davidson Institute Working Papers Series wp1026, William Davidson Institute at the University of Michigan.
  4. András Simonovits, 2006. "Social Security Reform in the US: Lessons from Hungary," IEHAS Discussion Papers 0602, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 24 Apr 2006.
  5. Iván Major, 2006. "Why do (or do not) banks share customer information? A comparison of mature private credit markets and markets in transition," IEHAS Discussion Papers 0603, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 24 Apr 2006.
  6. Rosen Marinov, 2006. "Competitive Pressure in Transition: A Role for Trade and Competition Policies?," IHEID Working Papers 06-2006, Economics Section, The Graduate Institute of International Studies.
  7. Rezitis, Anthony N., 2010. "Evaluating the state of competition of the Greek banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(1), pages 68-90, February.

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