Price-cost margins and fixed costs
Abraham, Filip Bormans, Yannick Konings, Jozef Roeger, Werner
Abraham, Filip
Bormans, Yannick
Konings, Jozef
Roeger, Werner
Citations
Altmetric:
Publication Type
Working paper
Editor
Supervisor
Publication Year
2021
Journal
Book
Publication Volume
Publication Issue
Publication Begin page
Publication End page
Publication NUmber of pages
Collections
Abstract
This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. We exploit properties of the primal and dual revenue based and cost based Solow residual. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit margins. Using a 30 year panel of Belgian firms we estimate price cost margins of 25.9% on average, with fixed costs as a fraction of sales of 23.4%. Fixed costs as well as price-cost margins have declined in the last three decades, pushing excess profit margins close to zero, suggesting competitive markets. The presence of fixed costs implies that price-cost margins might change not only due to a change in firms' market power, but also due to changes in the production process (i.e., the mix between variable and fixed costs) or even due to a combination of both. Our novel methodology is able to distinguish these underlying mechanisms, thereby providing an additional layer of insight to the ongoing academic and policy debate on firms' market power.
Research Projects
Organizational Units
Journal Issue
Keywords
Excess Profits, Fixed Costs, Market Power, Price-Cost Margins