Working Paper: NBER ID: w26057
Authors: Susanto Basu
Abstract: A number of recent papers have argued that US firms exert increasing market power, as measured by their markups of price over marginal cost. I review three of the main approaches to estimating economy-wide markups and show that all are based on the hypothesis of firm cost-minimization. Yet different assumptions and methods of implementation lead to quite different conclusions regarding the levels and trends of markups. I survey the literature critically, and argue that some of the startling findings of steeply-rising markups are difficult to reconcile with other evidence and with aggregate data. Existing methods cannot determine whether markups have been stable or whether they have risen modestly over the past several decades. Even relatively small increases in markups are consistent with significant changes in aggregate outcomes, such as the observed decline in labor’s share of national income.
Keywords: price-cost markups; market power; labor share; national income
JEL Codes: E23; E32; L11; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing markups (D43) | declining labor share of national income (E25) |
| increasing markups (D43) | reduced demand for labor (J20) |
| reduced demand for labor (J20) | lower wages (J31) |
| lower wages (J31) | diminished share of income for labor (E25) |
| higher markups (D49) | lower wages (J31) |