Measuring Market Power in U.S. Industry
NBER Working Paper No. 2212
Non-competitive conduct can be assessed by estimating the size of the markup or Lerner index achieved in a market. The markup implies a price elasticity of demand faced by the representative firm. For a given markup, non-competitive conduct is greater the more elastic is the market elasticity of demand. The ratio of the firm's to the market elasticity is a measure of non-competitive conduct that is insensitive to the value of the monopoly. To implement this measure, both the firm's and the market elasticities of demand must be estimated. Hall shows how to estimate the markup, and hence the elasticity faced by the firm, from the cyclical behavior of productivity. To estimate the market elasticity, an instrumental variables procedure exploiting a covariance restriction between productivity shocks and demand shocks is used. Results for broad sectors of private industry and for non-durable manufacturing industries display a wide range of monopoly power.