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Market Power, Economic Profitability and Productivity Growth Measurement: An Integrated Structural Approach

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Catherine J. Morrison

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Abstract

The purpose of this paper is to treat scale economies, profit-maximizing markups, economic profitability, capacity utilization and productivity growth within an integrated structural model, and to assess their interactions empirically using annual two-digit U.S. manufacturing data. Attention is focused on error biases in measuring productivity using traditional accounting procedures. An important conjecture by Robert Hall, that the coexistence of normal economic profits and positive markups of price over marginal cost imply the existence of substantial scale economies and excess capacity, is then examined using this structure. The empirical results suggest that markups in most U.S. manufacturing firms have increased over time, and tend to the countercyclical. However, procyclical capacity utilization and scale economies tend to offset the short run profit potential from markup behavior. As a result, on average economic profits are normal, but declining profitability is prevalent in most industries since the early 1970s. Also, although cost and revenue shares tend to be approximately equal, the error biases in standard productivity growth measures resulting from input fixity and scale economies are substantial, particularly over business cycles.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3355.

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Date of creation: May 1990
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Handle: RePEc:nbr:nberwo:3355

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  1. Jonsson, Magnus, 2004. "The Welfare Cost of Imperfect Competition and Distortionary Taxation," Working Paper Series 170, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  2. Ali Dib & Louis Phaneuf, 2001. "An Econometric U.S. Business Cycle Model with Nominal and Real Rigidities," Cahiers de recherche CREFE / CREFE Working Papers 137, CREFE, Université du Québec à Montréal. [Downloadable!]
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  5. Magnus Jonsson, 2007. "The welfare cost of imperfect competition and distortionary taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 576-594, October. [Downloadable!] (restricted)
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  9. Ernst R. Berndt & Ann F. Friedlaender & Judy Shaw-Er Wang Chiang, 1990. "Interdependent Pricing and Markup Behavior: An Empirical Analysis of GM, Ford and Chrysler," NBER Working Papers 3396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Jahangir Aziz & Luc Leruth, 1999. "Cyclical Effects of the Composition of Government Purchases," Macroeconomics 9902007, EconWPA. [Downloadable!]
  11. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Raphael Bergoeing, . "Can Nonhomothetic Preferences Explain the Post World War II Growth in Trade?," ILADES-Georgetown University Working Papers inv105, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
  14. Charlotta Groth, . "Estimating UK capital adjustment costs," Bank of England working papers 258, Bank of England. [Downloadable!]
  15. Benhabib, Jess & Farmer, Roger E.A., 1995. "Indeterminacy and Sector-Specific Externalities," Working Papers 95-02, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  16. Nadiri, M.I. & Nandi, B., 1996. "The Changing Structure of Cost and Demand for the U.S. Telecommunications Industry," Working Papers 96-40, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  17. Susanto Basu & John G. Fernald, 1994. "Constant returns and small markups in U.S. manufacturing," International Finance Discussion Papers 483, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  18. Soete,Luc & Ziesemer,Thomas, 1997. "Gains from trade and environmental policy under imperfect competition and pollution from transport," Research Memoranda 003, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology. [Downloadable!]
  19. Bunte,F. & Maks,H., 1997. "Contestability and sunk costs: An analysis of product R&D competition," Research Memoranda 009, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
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