This paper provides empirical evidence on the extent of producer heterogeneity in the output market by analyzing output price and price-marginal cost markups at the plant level for thirteen homogeneous manufactured goods. It relies on micro data from the U.S. Census of Manufactures over the 1963-1987 period. The amount of price heterogeneity varies substantially across products. Over time, plant transition patterns indicate more persistence in the pricing of individual plants than would be generated by purely random movements. High-price and low-price plants remain in the same part of the price distribution with high frequency, suggesting that underlying time-invariant structural factors contribute to the price dispersion. For all but two products, large producers have lower output prices. Marginal cost and the markups are estimated for each plant. The markup remains unchanged or increases with plant size for all but four of the products and declining marginal costs play an important role in generating this pattern. The lower production costs for large producers are, at least partially, passed on to purchasers as lower output prices. Plants with the highest and lowest markups tend to remain so over time, although overall the persistence in markups is less than for output price, suggesting a larger role for idiosyncratic shocks in generating markup variation.
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Costs, Demand, and Imperfect Competition as Determinants of Plant_level Output Prices
June 1992
Working Paper Number:
CES-92-05
The empirical modeling of imperfectly competitive markets has been constrained by the difficulty of obtaining micro data on individual producer prices, outputs, and costs. In this paper we utilize micro data collected from the 1977 Census of Manufactures to study the determinants of plant-level output prices among U.S. bread producers. A theoretical model of short-run price competition among plants producing differentiated products is used to specify reduced-form equations for each plant's price and output. Estimates of the reduced-form equations indicate that the main determinants of both the plant's output level and output price are the plant's own cost variables, particularly its capital stock and the prices of material inputs. The number of rival producers faced by the plant, the production costs of these rivals, and the demand conditions faced by the plant play no role in price or output determination. The results are not consistent with either oligopolistic competition or monopoly behavior, but rather are consistent with price-taking behavior by individual producers combined with output quality differentials across producers.
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Scale Economies and Consolidation in Hog Slaughter
March 2000
Working Paper Number:
CES-00-03
We use establishment based panel data to estimate a cost function which identifies the role of scale economies in hog slaughter consolidation. We find modest by extensive technological scale economies in the 1990s, and they became more important over time. But wages rose sharply with plant size through the 1970s and those wage premiums generated a pecuniary scale diseconomy that largely offset the effects of technological scale economies. The size-wage relation disappeared in the 1980; with growing technological scale economies and disappearing pecuniary diseconomies, large plants realized growing cost advantages over smaller plants, and production shifted to larger plants.
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The Slow Growth of New Plants: Learning about Demand?
March 2012
Working Paper Number:
CES-12-06
It is well known that new businesses are typically much smaller than their established industry competitors, and that this size gap closes slowly. We show that even in commodity-like product markets, these patterns do not reflect productivity gaps, but rather differences in demand-side fundamentals. We document and explore patterns in plants' idiosyncratic demand levels by estimating a dynamic model of plant expansion in the presence of a demand accumulation process (e.g., building a customer base). We find active accumulation driven by plants' past production decisions quantitatively dominates passive demand accumulation, and that within-firm spillovers affect demand levels but not growth.
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The Long-Run Demand for Labor: Estimates From Census Establishment Data
September 1993
Working Paper Number:
CES-93-13
This paper estimates long-run demand functions for production workers, production worker hours, and nonproduction workers using micro data from U.S. establishment surveys. The paper focuses on estimation of the wage and output elasticities of labor demand using data on over 41,000 U.S. manufacturing plants in 1975 and more than 30,000 plants in 1981. Particular attention is focused on the problems of unobserved producer heterogeneity and measurement errors in output that can affect labor demand estimates based on establishment survey data. The empirical results reveal that OLS estimates of both the own-price elasticity and the output elasticity of labor demand are biased downward as a result of unobserved heterogeneity. Differencing the data as a solution to this problem greatly exaggerates measurement error in the output coefficients. The use of capital stocks as instrumental variables to correct for measurement error in output significantly alters output elasticities in the expected direction but has no systematic effect on own-price elasticities. All of these patterns are found in estimates that pool establishment data across industries and in industry-specific regressions for the vast majority of industries. Estimates of the output elasticity of labor demand indicate that there are slight increasing returns for production workers and production hours, with a pooled data estimate of .92. The estimate for nonproduction workers in .98. The variation in the output elasticities across industries is fairly small. Estimates of the own-price elasticity vary more substantially with the year, type of differencing used, and industry. They average -.50 for production hours, -.41 for production workers, and -.44 for nonproduction workers. The price elasticities vary widely across manufacturing industries: the interquartile range for the industry estimates is approximately .40.
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Estimating market power Evidence from the US Brewing Industry
January 2017
Working Paper Number:
CES-17-06R
While inferring markups from demand data is common practice, estimation relies on difficult-to-test assumptions, including a specific model of how firms compete. Alternatively, markups can be inferred from production data, again relying on a set of difficult-to-test assumptions, but a wholly different set, including the assumption that firms minimize costs using a variable input. Relying on data from the US brewing industry, we directly compare markup estimates from the two approaches. After implementing each approach for a broad set of assumptions and specifications, we find that both approaches provide similar and plausible markup estimates in most cases. The results illustrate how using the two strategies together can allow researchers to evaluate structural models and identify problematic assumptions.
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Prices, Spatial Competition, and Heterogeneous Producers: An Empirical Test
August 2004
Working Paper Number:
CES-04-16
In markets where spatial competition is important, many models predict that average prices are lower in denser markets (i.e., those with more producers per unit area). Homogeneous-producer models attribute this effect solely to lower optimal markups. However, when producers instead differ in their production costs, a second mechanism also acts to lower equilibrium prices: competition-driven selection on costs. Consumers' greater substitution possibilities in denser markets make it more difficult for high-cost firms to profitably operate, truncating the equilibrium cost (and price) distributions from above. This selection process can be empirically distinguished from the homogenous-producer case because it implies that not only do average prices fall as density rises, but that upper-bound prices and price dispersion should also decline as well. I find empirical support for this process using a rich set of price data from U.S. ready-mixed concrete plants. Features of the industry offer an arguably exogenous source of producer density variation with which to identify these effects. I also show that the findings do not simply result from lower factor prices in dense markets, but rather because dense-market producers are low-cost because they are more efficient.
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Electricity Pricing to U.S. Manufacturing Plants, 1963-2000
October 2007
Working Paper Number:
CES-07-28
We construct a large customer-level database and use it to study electricity pricing patterns from 1963 to 2000. The data show tremendous cross-sectional dispersion in the electricity prices paid by manufacturing plants, reflecting spatial price differences and quantity discounts. Price dispersion declined sharply between 1967 and 1977 because of erosion in quantity discounts. To estimate the role of cost factors and markups in quantity discounts, we exploit differences among utilities in the purchases distribution of their customers. The estimation results reveal that supply costs per watt-hour decline by more than half over the range of customer-level purchases in the data, regardless of time period. Prior to the mid 1970s, marginal price and marginal cost schedules with respect to annual purchase quantity are remarkably similar, in line with efficient pricing. In later years, marginal supply costs exceed marginal prices for smaller manufacturing customers by 10% or more. The evidence provides no support for a standard Ramsey-pricing interpretation of quantity discounts on the margin we study. Spatial dispersion in retail electricity prices among states, counties and utility service territories is large, rises over time for smaller purchasers, and does not diminish as wholesale power markets expand in the 1990s.
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Entry, Exit, and the Determinants of Market Structure
September 2009
Working Paper Number:
CES-09-23
Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist's long-run profits by the same amount as if the firm operated in a duopoly.
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Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?
September 2005
Working Paper Number:
CES-05-11
There is considerable evidence that producer-level churning contributes substantially to aggregate (industry) productivity growth, as more productive businesses displace less productive ones. However, this research has been limited by the fact that producer-level prices are typically unobserved; thus within-industry price differences are embodied in productivity measures. If prices reflect idiosyncratic demand or market power shifts, high 'productivity' businesses may not be particularly efficient, and the literature's findings might be better interpreted as evidence of entering businesses displacing less profitable, but not necessarily less productive, exiting businesses. In this paper, we investigate the nature of selection and productivity growth using data from industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. A key dissimilarity is that physical productivity is inversely correlated with plant-level prices while revenue productivity is positively correlated with prices. This implies that previous work linking (revenue-based) productivity to survival has confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. We further show that young producers charge lower prices than incumbents, and as such the literature understates the productivity advantage of new producers and the contribution of entry to aggregate productivity growth.
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Technological Change and Economies of Scale in U.S. Poultry Slaughter
April 2000
Working Paper Number:
CES-00-05
This paper uses a unique data set provided by the Census Bureau to empirically examine technological change and economies of scale in the chicken and turkey slaughter industries. Results reveal substantial scale economies that show no evidence of diminishing with plant size and that are much greater than those realized in cattle and hog slaughter. Additionally, it is shown that controlling for plant product mix is critical to cost estimation and animal inputs are much more elastic to prices than in either cattle or hogs. Results suggest that consolidation is likely to continue, particularly if demand growth diminishes.
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