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Price-cost margins, fixed costs and excess profits

Author

Listed:
  • Filip Abraham

    (KU Leuven, Department of Economics, VIVES, Vlerick Business School)

  • Yannick Bormans

    (KU Leuven, Department of Economics, VIVES)

  • Jozef Konings

    (Nazarbayev University, Graduate School of Business)

  • Werner Roeger

    (DIW Berlin)

Abstract

This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a 30 year panel of Belgian firms we estimate price-cost margins, as a fraction of sales, of 25.4 percent on average, which can be decomposed between fixed costs of 22.9 percent and excess profits of 2.5 percent. Belgian price-cost margins have declined (-5.9 percent) in the past three decades due to a combination of falling fixed costs (-4.0 percent) and decreasing excess profits (-1.9 percent), suggesting output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.

Suggested Citation

  • Filip Abraham & Yannick Bormans & Jozef Konings & Werner Roeger, 2024. "Price-cost margins, fixed costs and excess profits," Working Papers 2024/10, Nazarbayev University, Graduate School of Business.
    • Handle: RePEc:asx:nugsbw:2024-10
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    Cited by:

    1. Licchetta Mirko & Martins Vitor Dias & Vašíček Bořek, 2025. "Selected Macroeconomic and Social Aspects of Housing Affordability," Intereconomics: Review of European Economic Policy, Paradigm, vol. 60(2), pages 101-106.
    2. Justinas Markauskas & Morten O. Ravn & Jose-Victor Rios-Rull, 2026. "Sticky Prices and Constraints to Produce," PIER Working Paper Archive 26-007, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    3. Haque, Qazi & Pavlov, Oscar & Weder, Mark, 2025. "Endogenous business cycles with small and large firms," European Economic Review, Elsevier, vol. 177(C).
    4. Mirko Licchetta & Giovanni Mattozzi, 2025. "Corporate margins and inflation during the post COVID-19 period in the euro area," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 24(1), pages 41-54, June.
    5. De Loecker, Jan & Fuss, Catherine & Quiller-Doust, Nathan & Treuren, Leonard, 2026. "The anatomy of costs and firm performance: Evidence from Belgium," International Journal of Industrial Organization, Elsevier, vol. 105(C).
    6. Daniel P. Monteiro, 2025. "A prism decomposition of euro area interest rates," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 24(1), pages 7-29, June.
    7. Licchetta, Mirko & Mattozzi, Giovanni, 2026. "Corporate margins and inflation during the post COVID-19 period in the Euro Area," Journal of Policy Modeling, Elsevier, vol. 48(3).

    More about this item

    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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