Fixed Costs, Imperfect Competition and Bias in Technology Measurement: Japan and the United States

This paper examines the direction and the magnitude of bias in the technological progress measurement caused by imperfect competition and fixed costs. We show that imperfect competition coupled with fixed costs is likely to make the traditional measurement of technological progress biased. The direction of bias depends on the relative magnitude of growth between the capital stocks and non-capital inputs and on whether firms enjoy a pure profit in the long run. We then measure the actual magnitude of this bias by re-estimating sectoral technological progress in Japan and the United States. We obtain three main results. First, Japan as a whole is less competitive and has larger fixed costs than the United States. Internationally competitive sectors in both countries have smaller fixed cots. Second, the bias in the measurement caused by imperfect competition and fixed costs is relatively small because firms' pure profit is close to zero. Third, there is a negative correlation between technological progress and the pure profit in the United States, though there is no correlation in Japan.