FRB: Constant Returns and Small Markups in U.S. Manufacturing

International Finance Discussion Papers

Constant Returns and Small Markups in U.S. Manufacturing
Susanto Basu and John G. Fernald
1994-483 (September 1994)

Abstract: We estimate that returns to scale are close to constant in two-digit gross output data. Value-added data appear instead to give significant increasing returns. We show why, with imperfect competition, value-added estimates are in general meaningless. We use data on intermediate inputs to correct the value-added estimates, and find that returns to scale again appear close to constant. Given that profits are small, our results imply that markups of price over marginal cost are also small.

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