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Increasing returns to scale and markups

Author

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  • Shanks, Olga
Abstract
I estimate aggregate and industry-specific elasticities of scale and markups for the U.S. economy over the period from 1980 to 2019 using data on publicly traded companies. I apply Olley–Pakes and Ackerberg–Caves–Frazer estimation methods and find that the aggregate elasticity of scale for the U.S. economy is 1.1 and has been rising. The elasticity of scale in turn serves as an input for calculating industry markups. Increasing returns to scale help explain observed increases in markups over the last decades for broad sectors of the economy. My estimate of 1.2 for the aggregate markup is significantly lower than the estimate of 1.6 found in recent literature. The large disparity in markup estimates stems from differences in the treatment of fixed and variable costs and the methodological approach to the calculation of markups.

Suggested Citation

  • Shanks, Olga, 2024. "Increasing returns to scale and markups," Structural Change and Economic Dynamics, Elsevier, vol. 70(C), pages 257-267.
    • Handle: RePEc:eee:streco:v:70:y:2024:i:c:p:257-267
    DOI: 10.1016/j.strueco.2024.02.009
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    More about this item

    Keywords

    Market concentration; Markup; Elasticity of scale; Increasing returns to scale; Production function estimation;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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