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Using Empirical Marginal Cost to Measure Market Power in the US Economy

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  • Robert E. Hall
Abstract
Market power arises in the case where a seller is aware that raising output will depress price. In the profit-maximizing equilibrium with market power, price exceeds marginal cost. The Lerner index---the ratio of price less marginal cost to the price---is a widely accepted measure of market power. Measuring marginal cost is a challenge. This paper develops and applies a direct empirical approach---marginal cost is measured as the ratio of the observed change in cost to the observed change in output. Because marginal cost is a partial derivative, both changes need to be adjusted for other sources of change. Thus marginal cost is the ratio of (1) the change in cost not associated with changes in input prices to (2) the change in output not associated with productivity change. I develop data for the 60 KLEMS industries for this measure. I find a typical Lerner index of 0.15. Lerner indexes grew moderately between 1988 and 2015.

Suggested Citation

  • Robert E. Hall, 2018. "Using Empirical Marginal Cost to Measure Market Power in the US Economy," NBER Working Papers 25251, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25251
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    References listed on IDEAS

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    1. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
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    3. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-947, October.
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    21. Satyajit Chatterjee & Burcu Eyigungor, 2023. "The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 132-157, April.
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    23. Jaumandreu, Jordi & Doraszelski, Ulrich, 2019. "Using Cost Minimization to Estimate Markups," CEPR Discussion Papers 14114, C.E.P.R. Discussion Papers.
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    25. Majah-Leah V. Ravago & James A. Roumasset & Arsenio M. Balisacan, 2021. "Adapting Competition Law and Policy for Economic Development with Asian Illustrations," Department of Economics, Ateneo de Manila University, Working Paper Series 202103, Department of Economics, Ateneo de Manila University.

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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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