Increasing Returns to Scale in Estimation of Markups
This paper estimates the elasticity of scale for different U.S. industries over the period from the 1980s to the present day using data on publicly traded companies. I apply four estimation methods: Ordinary Least Squares, Syverson’s method, Olley and Pakes’s method, and Ackerberg, Caves, and Frazer’s method. I find that the aggregate elasticity of scale has been increasing and is above one. Increasing returns to scale in turn can help explain the rising industry concentration and increases in markups for broad sectors of the economy. The aggregate markups calculated by recent literature go up as high as 1.6, while my estimates are around 1.2. The large difference stems from the classification of fixed and variable costs as well as inclusion vs. exclusion of the financial sector, which differs from other industries in substantive ways.