DP14114 Using Cost Minimization to Estimate Markups

Author(s): Ulrich Doraszelski, Jordi Jaumandreu
Publication Date: November 2019
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14114

De Loecker & Warzynski's (2012) method for recovering markups from cost-minimization conditions and estimated input elasticities yields either larger or smaller markups for exporters than for non-exporters depending on the input (labor or materials) employed. We point out two difficulties. First, under imperfect competition, an Olley & Pakes (1996) style estimator for input elasticities has to account for markups. Second, with commonly used specifi?cations of the production function, the cost-minimization conditions do not match the variation in the data. We discuss how to address these difficulties. According to our estimates, the markups of exporters and non-exporters are essentially the same.