An Inquiry Into Market Power

In the previous decades, production function estimations have been used to estimate firms' productivity and factors that influence it, such as industry structure changes or trade policies. Additionally, the last decade has seen a rise in the application of this method to estimate firms' markups in a broad range of sectors and countries and to identify aggregate trends. Furthermore, researchers have begun to use it to investigate potential power in the labor market. This thesis aims to investigate whether commonly taken assumptions of the production function estimation literature hold, how to deal with potential violations of them, and to apply this method to Germany. Chapter 1 contains a brief introduction to the method used in the papers, as well as the assumptions we will question. All following chapters are respectively based on one working paper. Chapter 2 is based on the working paper Labor Augmenting Productivity or Labor Market Power. Using the production function estimation framework, researchers can derive an estimate of the markups based on the material input and an estimate based on the labor input. As both expressions intend to measure the same economic size, they should be identical. However, many studies reject this. Usually, economists simply assume that either labor augmenting productivity or labor market power is the cause for this observed difference and then continue their investigation. This paper contributes in two ways to the literature. First, we compare the two possible explanations and, based on this, predict what patterns we should observe in the data, depending on which is true. Relying on this, we can run several tests to gather evidence of the likely cause for the difference in markups without requiring further data. Second, based on those insights, we investigate the German manufacturing sector and find that labor augmenting productivity is not a major concern. This finding gives credibility to other studies in this sector that implicitly assumed the absence of labor augmenting productivity. Chapter 3 follows the working paper (Development of) Regional Market Power in Germany. Based on the insight that labor market power is the likely explanation of the observed difference in markups in Germany, this paper creates a broad overview of market power in Germany. While previous papers have investigated the presence of labor market power, this study contributes beyond this. Specifically, we estimate material markups and wage markdowns for a broad range of industries and evaluate the trend and level of product and labor market power in Germany. Furthermore, we create a geographical overview of labor market power and investigate its regionality and what factors influence it. Chapter 4 is based on the working paper Infering material market power. Nearly all studies in the literature base their estimated markups on the assumption of a perfectly competitive material input market. The contribution of this paper is to propose a way to combine the results of the labor market literature with the production function literature, to evaluate whether material input markets are indeed perfectly competitive. For Germany, we find evidence against this, casting doubt on previous estimates of markups in Germany. The absence of such markets in Germany additionally puts into question, whether material input markets in other countries are perfectly competitive. Furthermore, relying on previous findings of the labor literature, we show how to correct the markups and revisit the markup findings from Chapter 3.