Discussion paper

DP19677 Robust Production Function Estimation when there is Market Power

The production function is an input/output technical relationship, not affected by market power. However, recent estimators make auxiliary use of optimal choices of the firm that depend on market power. In this context, marginal cost encompasses all relevant information on the firm’s strategic actions and heterogeneity of demand. For being robust, it is enough to specify the estimator in terms of the average variable cost and the ratio AVC/MC or short-run elasticity of scale. This also reveals that the estimators known as "dynamic panel" and "OP/LP" are closely related. We derive two specification tests.

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Citation

Jaumandreu, J (2024), ‘DP19677 Robust Production Function Estimation when there is Market Power‘, CEPR Discussion Paper No. 19677. CEPR Press, Paris & London. https://cepr.org/publications/dp19677

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Supply chain shortages, large firms’ market power, and inflation

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  • International trade
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  • Inflation