Markup estimation: A comparison of contemporary methods at the example of European food retailers

Abstract

We compare the economic and econometric assumptions of two contemporary procedures for the estimation of markups, the stochastic frontier approach (SFA) and the production function approach (PFA), and apply them to EU food retailing over the period 2010–2018. Although, the estimates of the underlying technology of the two methods are similar, our results suggest that the PFA leads to significantly larger markups, yielding approximated excess consumer expenditures 58.14%–313.33% larger than predicted by the SFA. In addition, the correlation of markups between the two methods is low. This can have implications for the consistency of policy recommendations based on the SFA and the PFA as they yield different outcomes with respect to the state of competition in a market. Last, we find a link between market concentration and markups for the PFA pointing towards adverse effects of further concentration on consumer welfare, whereas our results show no evidence for a relationship between SFA markups and market concentration. [EconLit Citations: D22, D43, L11, L13, L81, Q18]

Markups and export behavior: Firm‐level evidence from the French food processing industry

“…iii iii There is evidence for the presence of significant firm‐ and industry‐level markups in the food sector (e.g. Curzi et al, 2020; Garrone & Swinnen, 2018; Karagiannis et al, 2018; Koppenberg & Hirsch, 2021; Lopez et al, 2018; Sexton & Xia, 2018; Vancauteren, 2013; Wilhelmsson, 2006). Firms' ability to charge markups is partly due to their export behavior and can partly explain that behavior (Bellone et al, 2016; De Loecker, 2013; Kilinc, 2019).…”

Output market power and firm characteristics in dairy processing: Evidence from three EU countries

“…Other promising approaches to estimate markups are the demand system approach (Berry et al, 1995; Nevo, 2001)—which avoids the estimation of cost parameters but estimates demand and vertical relationships in supply chains based on price data—which is unavailable in our case. Another example is the production function approach introduced by Hall (1988) and recently applied in various studies such as De Loecker and Warzynski (2012), De Loecker et al (2020) or Koppenberg and Hirsch (2021). However, the approach has been criticised due to issues with respect to recovering parameters of the technology in the primal problem (e.g.…”

Market Imperfections within the European Wheat Value Chain: The Case of France and the United Kingdom

“…The approaches for determining the market concentration and imperfections in food supply chains between different actors can fall into three categories. Generally speaking, the empirical approaches can be divided into 'structure', 'conduct', and 'performance' approaches [18,19]. The 'structure' approach refers to a simple way to test market structure by finding the share of the q largest firms (CRq) or via the Herfindahl-Hirschman Index (HHI).…”

“…A 'Mark-up', 'Mark-down', or 'Lerner' index are three indicators from this category [18]. This category of methods is a better indicator of firms' behavior, but it has also received some criticisms based on their underlying assumptions [19]. Thus, modifications and extensions to this approach have been offered by, for example, Kumbhakar et al [21], based on stochastic frontier analysis (SFA), and by Hall [22], and later, De Loecker and Warzynski [23], based on the production function approach (PFA).…”

“…The difficulty in these cases is the availability of adequate databases and estimations of rigorous econometric models of firms' prices and quantities. Furthermore, differing results are normally estimated by various methods from this category of approaches [19]. Our research falls under this category, as we applied the SFA methodology.…”