Estimation of Firm Level Markups
Lionel Nesta
OFCE SciencesPo
Keio University, Japan
June/July 2015
Syllabus
Economic theory tells us that perfect competition in the product markets leads to zero profits in thelong run. On the one hand, firms enjoying market power on the product market will be price makers,
a behavior known to deter the consumer surplus and overall welfare in the short run. On the other
hand, firm profits – an expression of market power at the firm level – is the key to sustained
investments, innovation and productivity growth in the long run. Therefore, an important issue forpolicy makers is to be able to measure market power by firms.
The difficulty is that to measure market power is not a simple task. Contrary to accounting markups
which is simply the profitability of the company (profit to value added ratio), economic markups canbe neither observed directly nor computed using simple accounting data. The reason for this is that
economic markups are defined as the price to marginal cost ratio, two variables that are notobservable in firm level census. In order to circumvent this difficulty, one needs to develop a reduced
form of a more structural model departing from the profit maximization / cost minimization behaviorof the company.
This course aims to estimate economic markups at the firm level. To do so, it will review few
methods (Hall 1988, Roeger 1995, Klette 1999, DeLoeker & Warzynski 2012). Because it is based ondata handling, a dataset will be provided to student with all relevant variables. Particular emphasis
will be put between reading equations in scientific papers and implementing them on Stata, the mostdiffused statistical and econometrics software among economists. Students will be asked to measure
estimated markups and provide policy relevant comments.

References
De Loecker, J. and Warzynski, F., 2012. Markups and Firm-Level Export Status. American Economic
Review 102, 2437-2471.
Hall, Robert E., 1986, Market Structure and Macroeconomic Fluctuations, Brookings Papers on
Economic Activity, Vol. 17, No. 2., 285-338.
Hall, Robert E., The Relation between Price and Marginal Cost in U.S. Industry, The Journal of Political
Economy, Vol. 96, No. 5. (Oct., 1988), pp. 921-947.

Klette, Tor Jakob, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel ofEstablishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-76,
December.
Matsuura, Toshiyuki, 2010, Introduction to Data analysis - from basic economic analysis to panel dataanalysis, TokyoTosho Co Ltd, Tokyo, Japan (in Japanese).
Roeger, Werner, Can Imperfect Competition Explain the Difference between Primal and Dual
Productivity Measures? Estimates for U.S. Manufacturing, The Journal of Political Economy, Vol. 103,No. 2. (Apr., 1995), pp. 316-330.
Wooldridge, Christopher, 2012, Introductory Econometrics: A Modern Approach, CENGAGE Learning
Custom Publishing, 5th edition.

Prerequisite
Proficient in English
Basic knowledge of microeconomics
Good knowledge of statistics and econometrics
Good knowledge of Stata

Practical information
This course is planned to last four hours and students are expected to bring their own laptop with theStata software already installed.