We disentangle the extent of imperfect competition in product and labor markets using plant level data. We derive a formula for the ratio between markups and markdowns assuming costminimizing firms that face upward-sloping labour supply and downward-sloping product demand curves. We then separate this combined measure of market power by estimating firm-level labour supply elasticities instrumenting wages with a different set of instruments: including the use of intermediate inputs, input price shocks, and TFP shocks. Our results suggest that both markets exhibit imperfect competition, but the variation is mainly driven by markups. We also estimate the relative gains of removing market power dispersion on allocative efficiency, finding that markups are more important on TFP than markdowns.
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Dario Tortarolo and Roman D. Zarate
University of Nottingham
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