Working Paper: NBER ID: w22957
Authors: Jan De Loecker; Paul T. Scott
Abstract: While inferring markups from demand data is common practice, estimation relies on difficult-to-test assumptions, including a specific model of how firms compete. Alternatively, markups can be inferred from production data, again relying on a set of difficult-to-test assumptions, but a wholly different set, including the assumption that firms minimize costs using a variable input. Relying on data from the US brewing industry, we directly compare markup estimates from the two approaches. After implementing each approach for a broad set of assumptions and specifications, we find that both approaches provide similar and plausible markup estimates in most cases. The results illustrate how using the two strategies together can allow researchers to evaluate structural models and identify problematic assumptions.
Keywords: Markup estimation; Market power; Brewing industry; Demand approach; Production approach
JEL Codes: D2; L1; L2; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand approach (D46) | markup estimates (D43) |
| production approach (E23) | markup estimates (D43) |
| demand approach (D46) | prices (P22) |
| production approach (E23) | prices (P22) |
| markup estimates (D43) | market power (L11) |
| choice of instruments (C36) | markup estimates (D43) |