The Hitchhiker's Guide to Markup Estimation

How do estimates of firm-level markups that rely on production function estimations depend on common data limitations? With a tractable analytical framework, simulation from a quantitative model, and firm-level administrative production and pricing data, we study biases due to the use of revenue instead of quantity, and due to production function misspecification. Estimates from revenue mismeasure the level of markups, but do contain useful information about true markups. Conversely, misspecified production functions have little effect on the estimated average markup but reduce its information content. Finally, revenue and quantity markups display similar correlations with variables such as profitability and market share in our data.