Estimating Market Power: Evidence From the US Brewing Industry

(Joint work with Jan De Loecker)

Abstract: While inferring markups from demand data is common practice, the 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 both strategies using what is now standard data on both market-level demand and plant-level production. The brewing industry has been the subject of many empirical studies on market power, pass-through and market structure, and therefore serves as an excellent testing ground for both methodologies. We find that the two approaches provide similar and plausible markup estimates.

This seminar is also an Applied Economics Workshop.

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