The Price–marginal Cost Markup and Its Determinants in U.S. Manufacturing

Abstract

This paper estimates the price-marginal cost markup for US manufacturing using a new methodology. Most existing techniques of estimating the markup are a variant on Hall's (1988) framework involving the manipulation of the Solow Residual. However this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate. By relaxing this assumption, we are able to derive a generalized markup index, which when estimated using manufacturing data is highly countercyclical and decreasing in trend since the 1960s. When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry. Thus, increasing foreign competition in manufacturing has led to a decline in the industry's markup over time.JEL Classification: D24, D40, E32

On the Gains from Monetary Policy Commitment Under Deep Habits

“…Not only is this observation consistent with U.S. experience (e.g., Rotemberg and Woodford, 1999;Mazumder, 2014), recent studies have demonstrated that it also strengthens the model's internal propagation mechanisms. Ravn et al (2006) show that by inducing countercyclical mark-ups, deep habits can account for the observed procyclical responses of consumption and wages to a government spending shock.…”

The Effects of Competition, Liquidity and Exports on Markups: Evidence from the UK Food and Beverages Sector

“…Shapiro (1987) and Norrbin (1993) estimated a positive price-cost margin exercised by the US manufacturing sectors suggesting that the market structure corresponds to imperfect competition. Mazumder (2014) supports the presence of countercyclical and falling markups since the 1960s because the price-cost margin depends on the share of manufacturing imports. For this reason, the increase of foreign competition over the years forced the US firms to adjust their price level downwards, thus converging to perfect competition.…”

Regional Economic Outlook, October 2019, Sub-Saharan Africa

“…Existing research documents that trade liberalization has significant effects on firm behavior and performance through an increase in competition. Notably, trade liberalization stimulates firm innovation, productivity, and efficiency, while helping to lower product prices and firm costs, thereby affecting firm markups (Saggay, Heshmati, and Dhif 2007;Mazumder 2014;Edmond, Midrigan, and Xu 2015;De Loecker and others 2016). Trade liberalization is, thus, usually a major element of product market and competition reforms.…”