Micro and Macro Perspectives on Production-Based Markups
John Fernald, Amit Gandhi, Dimitrije Ruzic, James Traina
TLDR
This paper reviews the production approach to estimating markups, highlighting its theoretical cleanliness but practical issues leading to conflicting empirical findings.
Key contributions
- Reviews the "production approach" for estimating markups, emphasizing its scalability and model independence.
- Frames production-based markups as a residual, explaining why small implementation differences yield starkly different results.
- Discusses the ongoing debate on markup trends (rising vs. not) and the importance of measuring market power.
- Offers practical guidance on data/estimation and advocates for transparency regarding technology's role.
Why it matters
Understanding markups is crucial for assessing market power and competition. This paper clarifies why different methods produce conflicting results, guiding future research and improving economic measurement. It emphasizes the need for transparency in distinguishing markups from technological factors.
Original Abstract
We review the "production approach" to estimating markups, the ratio of price to marginal cost. The approach is uniquely scalable: it requires no model of consumer demand or market structure and applies broadly across firms, industries, and time. Our organizing insight is that the production-based markup is a residual. Like the Solow residual, it is clean in theory but potentially contaminated by misspecification and mismeasurement. This framing helps explain why small differences in implementation can produce starkly different results from the same data. In some cases, markups have risen sharply. In others, they have not. Despite the disagreements in the literature, the importance of understanding and measuring market power cannot be overstated. We provide conceptual rationales for this disagreement, offer practical guidance on data and estimation, and call for greater transparency about how much of the variation attributed to markups may instead reflect technology.
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