COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Post Office Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 828

"Measuring Market Power in United States Industry"

Matthew D. Shapiro

April 1987

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.

JEL Classification: 611, 022, 212

Keywords: Market power, markup, Lerner index, elasticities, monopoly power, instrumental variables