Working Paper: NBER ID: w2115
Authors: Ian Domowitz; R. Glenn Hubbard; Bruce C. Petersen
Abstract: The relevance of imperfect competition for models of aggregate economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization. Measuring properly the size of industry markups of price over marginal cost is important both for assessing the role of market structure and for determining the extent to which excess capacity is a significant feature accompanying imperfect competition in American industry. Using a panel data set on four-digit Census manufacturing industries, this paper expands recent work by Robert Hall on the importance of market structure for understanding cyclical fluctuations. We outline a methodology for estimating industry markups of price over cost and the influence of market structure on cyclical movements in total factor productivity. While we find evidence to support the proposition that price exceeds marginal cost in U.S. manufacturing, our results offer only limited support for the notion that markups are importantly related to differences in industry concentration, though the effect of unionization is important. Concentration effects are important only in industries producing durable goods or differentiated consumer goods. In addition, much of the estimated markup of price over marginal cost is accounted for by fixed costs related to overhead labor, advertising, and central office expenses; we do not find compelling evidence of substantial evidence of excess capacity in most industries.
Keywords: Market Structure; Cyclical Fluctuations; US Manufacturing; Imperfect Competition; Total Factor Productivity
JEL Codes: L11; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market power (L11) | price exceeds marginal cost (D40) |
| unionization (J50) | markups in durable and differentiated consumer goods industries (L68) |
| fixed costs (D24) | observed price-cost margins may not indicate high profitability (L11) |
| markups (D43) | do not necessarily translate into substantial excess capacity (D24) |
| industry concentration (L69) | markups are not significantly related to industry concentration (L11) |