Price-cost margins and fixed costs
Abraham, Filip Bormans, Yannick Konings, Jozef Roeger, Werner
Abraham, Filip
Bormans, Yannick
Konings, Jozef
Roeger, Werner
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Publication Type
Working paper
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Publication Year
2020
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Book
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Publication Number of pages
53
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Abstract
This paper introduces a new method which allows to simultaneously estimate price-cost margins and fixed costs in production, using standard production data on expenditures of inputs and revenue at the firm level. In particular, we exploit properties of the primal and dual price based and cost based Solow residual, in which we allow not only for the flexible treatment of capital (either fixed, variable or a combination of both) but also for the flexible treatment of other input factors, such as labor and intermediate inputs. We use a 30 year long firm level panel of Belgian firms to estimate price-cost margins and fixed costs as a share of revenue to show the following key results: Ignoring fixed costs in production, as in most of the literature, underestimates price-cost margins and overestimates excess profit margins. We also find that fixed costs as well as price-cost margins decline in the last three decades, pushing excess profit margins downwards, suggesting highly competitive markets in Belgium.
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Keywords
Price-Cost Margins, Fixed Costs, Excess Profits, Market Power, Firm Level Data