Micro and Macro Perspectives on Production-Based Markups

TL;DR

This paper reviews the production approach to estimating markups, highlighting its scalability, potential issues, and the importance of accurate measurement of market power across industries.

Contribution

It provides a comprehensive review, practical guidance, and conceptual insights into the production-based markup estimation method, emphasizing transparency and accuracy.

Findings

Markups have varied widely over time and across industries.

Small methodological differences can lead to large discrepancies in results.

Understanding the role of technology is crucial in markup estimation.

Abstract

We review the "production approach" to estimating markups, the ratio of price to marginal cost. The approach is uniquely scalable: it requires no model of consumer demand or market structure and applies broadly across firms, industries, and time. Our organizing insight is that the production-based markup is a residual. Like the Solow residual, it is clean in theory but potentially contaminated by misspecification and mismeasurement. This framing helps explain why small differences in implementation can produce starkly different results from the same data. In some cases, markups have risen sharply. In others, they have not. Despite the disagreements in the literature, the importance of understanding and measuring market power cannot be overstated. We provide conceptual rationales for this disagreement, offer practical guidance on data and estimation, and call for greater transparency about how much of the variation attributed to markups may instead reflect technology.