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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 ()
Gábor Korösi ()
Nikolay Markov ()
László Halpern ()

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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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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 2004-710.

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Length: 28 pages
Date of creation: 01 Jul 2004
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Handle: RePEc:wdi:papers:2004-710

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Related research
Keywords: markup pricing market imperfections return to scale Bulgaria Hungary

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  2. 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. [Downloadable!]
  3. Konings, Jozef & Van Cayseele, Patrick & Warzynski, Frederic, 2001. "The dynamics of industrial mark-ups in two small open economies: does national competition policy matter?," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 841-859, April. [Downloadable!] (restricted)
    Other versions:
  4. 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 Economics Department. [Downloadable!]
  5. 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.
    Other versions:
  6. Matthew D. Shapiro, 1987. "Measuring Market Power in U.S. Industry," Cowles Foundation Discussion Papers 828, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  7. Harry Bloch & Michael Olive, 2001. "Pricing over the Cycle," Review of Industrial Organization, Springer, vol. 19(1), pages 99-108, August. [Downloadable!] (restricted)
  8. 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 Stephen M. Ross Business School. [Downloadable!]
  9. 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.
    Other versions:
  10. Robert E. Hall, 1988. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. László Halpern & Gábor Körösi, 2001. "Efficiency and market share in the Hungarian corporate sector," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(3), pages 559-592, November. [Downloadable!] (restricted)
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  12. 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. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. 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 Stephen M. Ross Business School. [Downloadable!]
  15. Rikke Willemoes Joergensen & Svend Hylleberg, . "A Note on the Estimation of Markup Pricing in Manufacturing," Economics Working Papers 1998-6, School of Economics and Management, University of Aarhus. [Downloadable!]
  16. 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 Stephen M. Ross Business School. [Downloadable!]
  17. 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. [Downloadable!] (restricted)
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  18. 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 Economics Department. [Downloadable!]
  19. Justman, Moshe, 1987. "An Extension of Lerner's Monopoly Index for Markets with a Disparity between Long- and Short-run Demand Elasticities," Economic Inquiry, Oxford University Press, vol. 25(4), pages 681-94, October.
  20. Roberts, Mark J. & Supina, Dylan, 1996. "Output price, markups, and producer size," European Economic Review, Elsevier, vol. 40(3-5), pages 909-921, April. [Downloadable!] (restricted)
  21. 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. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rosen Marinov, 2006. "Competitive Pressure in Transition: A Role for Trade and Competition Policies?," HEI Working Papers 06-2006, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
  2. 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, Hungarian Academy of Sciences, revised 24 Apr 2006. [Downloadable!]
  3. 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. [Downloadable!]
    Other versions:
  4. András Simonovits, 2006. "Social Security Reform in the US: Lessons from Hungary," IEHAS Discussion Papers 0602, Institute of Economics, Hungarian Academy of Sciences, revised 24 Apr 2006. [Downloadable!]
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