Tuesday, April 30, 2019

Testing the Production Approach to Markup Estimation

Devesh Raval, Federal Trade Commission is Testing the Production Approach to Markup Estimation.

Abstract: Under the underlying assumptions of the production approach to markup estimation, one should recover the same markup from any flexible input. I test this approach by comparing estimates of markups derived using labor and materials for four national manufacturing censuses and store-level data from a nationwide US retailer. Across all five datasets, I find that markups estimated using labor are negatively correlated with those estimated using materials, exhibit much greater dispersion, and have different trends over time. I also find different correlations with the degree of competition faced by the store for the retailer. I examine several mechanisms that may explain these findings, and find evidence that they are consistent with plant level heterogeneity in production technology. In order to successfully measure markups, the production approach will have to model such heterogeneity.


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