Publication type
Journal article with impact factorPublication Year
2024Journal
The Economic Journal
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Show full item recordAbstract
This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a 30 year panel of Belgian firms we estimate price-cost margins, as a fraction of sales, of 25.4% on average, which can be decomposed between fixed costs of 22.9% and excess profits of 2.5%. Belgian price-cost margins have declined (-5.9%) in the past three decades due to a combination of falling fixed costs (-4.0%) and decreasing excess profits (-1.9%), suggesting output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.Keyword
Firm Behavior, Oligopoly and Other Imperfect Markets, Industrial Organization and Macroeconomics, Industrial Structure and Structural Change, Industrial Price IndicesKnowledge Domain/Industry
Entrepreneurshipae974a485f413a2113503eed53cd6c53
10.1093/ej/ueae037