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Economic fluctuations, market power, and returns to scale: Evidence from firm‐level data
Author(s) -
Chirinko R. S.,
Fazzari S. M.
Publication year - 1994
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950090105
Subject(s) - economics , market power , lerner index , econometrics , marginal cost , returns to scale , markup language , panel data , aggregate (composite) , index (typography) , scale (ratio) , microeconomics , monetary economics , production (economics) , materials science , physics , quantum mechanics , world wide web , computer science , xml , composite material , monopoly , operating system
Recent research on aggregate fluctuations, coupled with ongoing work in industrial organization, has renewed interest in the existence, magnitude, and cyclical pattern of market power and the extent of increasing returns to scale. By exploiting restrictions from dynamic theory and information from financial markets, we present a framework for generating quantitative evidence on market power and returns to scale. Tailoring the econometric model to firm‐level panel data, we calculate the percentage differential between price and marginal cost (the Lerner index) in terms of the parameters from the econometric system. Results for firms in eleven industries indicate that there is a great deal of heterogeneity in the extent of market power. Industries with significantly positive Lerner indices tend to have substantial increasing returns in the production technology. We find that there is only a modest relation between our estimated Lerner indices and traditional measures of market power and that, when market power varies temporally, it is usually procyclical. Thus, variations in the markup of price over marginal cost may help dampen aggregate economic fluctuations.