In this paper we apply an innovative econometric tool to estimate mark-ups in an output market. The contribution of the paper is in the novel use of the stochastic frontier approach that is widely used to estimate efficiency. We show that this method, which we call the stochastic frontier estimator of market power, can be used both in the dual cost function framework and in the primal framework, and that mark-ups can be estimated with or without constant returns to scale. We apply this method to the Norwegian sawmilling industry, 1974–91.
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Kumbhakar, S.C., Baardsen, S. & Lien, G. A New Method for Estimating Market Power with an Application to Norwegian Sawmilling. Rev Ind Organ 40, 109–129 (2012). https://doi.org/10.1007/s11151-012-9339-7
- Input distance function
- Market failure
- Market power
- Stochastic frontier