‘Not Even Wrong’
Chapter 10: Problems posed by the accounting identity for the estimation of the degree of market power and the mark-up
In addition to the assumption that a production function exists, neoclassical economic theory often makes the assumption that markets in capitalist economies behave as if they are perfectly competitive with factors of production paid their marginal products. This is notwithstanding the highly oligopolistic nature of the industrial structure in most countries. Consequently, it is an important empirical question as to whether or not this is the case, although it is not an easy proposition to test. In a series of articles, Hall (1986, 1987, 1988a, 1988b, 1990) has proposed what some see as an innovative method to estimate whether firms set prices above or equal to marginal costs, and hence whether or not they exhibit market power. The method consists in comparing movements in output and inputs, through the production function. An extension of this approach also estimates the degree of returns to scale.
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