Measuring Markups from Revenue and Total Cost: An Application to Japanese Plant-Product Matched Data

The evolution of product markups has important implications for macroeconomic dynamics. However, thus far, the trends and distributions of product markups have been very different, depending on how they are estimated. This paper uses plant-product matched data from Japan, and theoretically and empirically compares two alternative measures of product markups. One measure is De Loecker and Warzynski's (2012) state-of-the-art production approach that estimates production function parameters and computes markups from the output elasticities of an input divided by that input's revenue share. An alternative measure, which has been much less frequently applied empirically to micro data, is Diewert and Fox's (2008) approach that derived markups from the revenues divided by the total costs. Markups derived from the latter approach are consistent with the theoretical predictions: The markups increase as their market power increases and as their marginal costs decline.