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Price-cost Margins and Fixed Costs

Author

Listed:
  • Filip Abraham
  • Yannick Bormans
  • Jozef Konings
  • Werner Roeger

Abstract

This paper introduces a new method which allows to simultaneously estimate price-cost margins and fixed costs in production, using standard production data on expenditures of inputs and revenue at the firm level. In particular, we exploit properties of the primal and dual price based and cost based Solow residual, in which we allow not only for the flexible treatment of capital (either fixed, variable or a combination of both) but also for the flexible treatment of other input factors, such as labor and intermediate inputs. We use a 30 year long firm level panel of Belgian firms to estimate price-cost margins and fixed costs as a share of revenue to show the following key results: Ignoring fixed costs in production, as in most of the literature, underestimates price-cost margins and overestimates excess profit margins. We also find that fixed costs as well as price-cost margins decline in the last three decades, pushing excess profit margins downwards, suggesting highly competitive markets in Belgium.
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Suggested Citation

  • Filip Abraham & Yannick Bormans & Jozef Konings & Werner Roeger, 2021. "Price-cost Margins and Fixed Costs," Working Papers of Department of Economics, Leuven 685401, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    • Handle: RePEc:ete:ceswps:685401
    Note: paper number 16796
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    File URL: https://lirias.kuleuven.be/retrieve/962b1fdb-d61e-4748-b719-8204097613b4
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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