Price-Cost Margins, Fixed Costs and Excess Profits
Abraham F. Bormans Y. Konings J. Roeger W.
1 October 2024Oxford University Press
Economic Journal
2024#134Issue 6632655 - 2684 pp.
This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a thirty-year panel of Belgian firms, we estimate price-cost margins, as a fraction of sales, of 25.4% on average, which can be decomposed between fixed costs of 22.9% and excess profits of 2.5%. Belgian price-cost margins have declined (-5.9%) in the past three decades due to a combination of falling fixed costs (-4.0%) and decreasing excess profits (-1.9%), suggesting that output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.
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KU Leuven, Vlerick Business School, Belgium
KU Leuven, Belgium
Nazarbayev University, Kazakhstan
DIW Berlin, Germany
KU Leuven
KU Leuven
Nazarbayev University
DIW Berlin
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