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Firms’ Price Markups and Returns to Scale in Imperfect Markets: Bulgaria and Hungary

Rumen Dobrinsky (), Gabor Korosi, Nikolay Markov () and László Halpern ()

William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: Under perfect competition and constant returns to scale, firms producing homogeneous products set their prices at their marginal costs which also equal their average costs. However, the departure from these standard assumptions has important implications with respects to the derived theoretical results and the validity of the related empirical analysis. In particular, monopolistic firms will charge a markup over their marginal costs. We show that firms’ markups tend to be directly associated with the employed production technology, more specifically with their returns to scale. Accordingly, we analyze the implications for the markup ratios from the incidence of non-constant returns to scale. We present quantitative results illustrating the effect of the returns to scale index on the firms’ price markups, as well as the relationship between the two indicators, on the basis of firm-level data for Bulgarian and Hungarian manufacturing firms.

Keywords: markup pricing; market imperfections; return to scale; Bulgaria; Hungary (search for similar items in EconPapers)
JEL-codes: C23 D21 D24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-tra
Date: 2004-07-01
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