Measuring Market Power in U.S. Industry
Non-competitive conduct can be assessed by estimating the size of the markup or Lerner index achieves in a market. The markup implies a price elasticity of demand faced by the representative ﬁrm. For a given markup, non-competitive conduct that is insensitive tot he 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.
Shapiro, Matthew D., "Measuring Market Power in U.S. Industry" (1987). Cowles Foundation Discussion Papers. 1071.