Price-cost margins, fixed costs and excess profits

Filip Abraham, Yannick Bormans, Jozef Konings and Werner Roeger
Additional contact information
Filip Abraham: KU Leuven, Department of Economics, VIVES, Vlerick Business School
Yannick Bormans: KU Leuven, Department of Economics, VIVES
Jozef Konings: Nazarbayev University, Graduate School of Business
Werner Roeger: DIW Berlin

No 2024/10, Working Papers from Nazarbayev University, Graduate School of Business

Abstract: 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 30 year panel of Belgian firms we estimate price-cost margins, as a fraction of sales, of 25.4 percent on average, which can be decomposed between fixed costs of 22.9 percent and excess profits of 2.5 percent. Belgian price-cost margins have declined (-5.9 percent) in the past three decades due to a combination of falling fixed costs (-4.0 percent) and decreasing excess profits (-1.9 percent), suggesting 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.

Keywords: Price-cost margins; fixed costs; excess profits; market power; firm level data (search for similar items in EconPapers)
JEL-codes: D24 D43 L11 L13 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2024-03
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