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Estimating Mark‐Ups From Plant‐Level Data

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  • SERGIO A. DeSOUZA

Abstract

Typical plant‐level data sets do not report quantities. This paper shows that estimating mark‐ups (price‐cost ratio) in product‐differentiated industries using deflated sales to proxy quantity is not appropriate due to unobserved price heterogeneity. This paper presents an econometric model for estimating mark‐ups that controls for unobserved prices. The model shows that ignoring price heterogeneity results in mark‐up estimates that converge to one, whatever the value of the true price‐cost ratio. Estimates obtained using real data are consistent with this result, as they reveal that ignoring price heterogeneity leads to spurious evidence of firms with little or no market power.

Suggested Citation

  • SERGIO A. DeSOUZA, 2009. "Estimating Mark‐Ups From Plant‐Level Data," Journal of Industrial Economics, Wiley Blackwell, vol. 57(2), pages 353-363, June.
    • Handle: RePEc:bla:jindec:v:57:y:2009:i:2:p:353-363
    DOI: 10.1111/j.1467-6451.2009.00378.x
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    References listed on IDEAS

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    1. Klette, Tor Jakob & Griliches, Zvi, 1996. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 343-361, July-Aug..
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    3. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
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    Cited by:

    1. Francois, Joseph & Manchin, Miriam & Martin, Will, 2013. "Market Structure in Multisector General Equilibrium Models of Open Economies," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1571-1600, Elsevier.
    2. Flath, David, 2011. "Industrial concentration, price-cost margins, and innovation," Japan and the World Economy, Elsevier, vol. 23(2), pages 129-139, March.

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