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The upward bias of markups estimated from the price-based methodology

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Abstract

Previous studies have emphasized that Roeger's methodology generates too high markups. This feature is confirmed on the basis of the unrealistically low capital shares implied by the estimates herein. Theoretically, it is shown that the normalization choice, the slow adjustment of capital and the mismeasurement of capital expenditures, each produces an upward bias. For instance, the price-based estimated markup is in fact the markup adjusted for returns to scale on the variable inputs only. Based on the empirical analysis, each of these sources of overestimation is very likely to play a role.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number bla05055.

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Length: 29 pages
Date of creation: Sep 2005
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Handle: RePEc:mse:wpsorb:bla05055

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Keywords: Markup; capital fixity; imperfect competition.;

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  1. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
  2. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
  3. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital Utilization and Returns to Scale," NBER Working Papers 5125, National Bureau of Economic Research, Inc.
  4. Klette, T.J., 1998. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Memorandum 15/1998, Oslo University, Department of Economics.
  5. Hindriks, F.A. & Nieuwenhuijsen, H.R. & de Wit, G., 2000. "Comparative Advantages in Estimating Markups," Papers 0003/e, NEUHUYS - RESEARCH INSTITUTE FOR SMALL AND MEDIUM.
  6. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
  7. 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.
  8. 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.
  9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  10. Shapiro, Matthew D, 1993. "Cyclical Productivity and the Workweek of Capital," American Economic Review, American Economic Association, vol. 83(2), pages 229-33, May.
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Cited by:
  1. Hervé Boulhol, 2005. "The convergence of price-cost margins," Cahiers de la Maison des Sciences Economiques bla05056, Université Panthéon-Sorbonne (Paris 1).

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