Markup, Returns to Scale, the Business Cycle and Openness: Evidence from Australian Manufacturing

A Hall type model that includes intermediate materials in the production function and allows for non-stochastic time variation in the contribution of technical change to output growth is used to estimate markup and returns to scale for eight Australian manufacturing industries at approximately the two-digit level, during the period 1971-72 to 1984-85. Six of the eight manufacturing industries indicate markups that are greater than one, implying the widespread existence of market power in Australian manufacturing. Constant returns to scale are not rejected for any individual industry or jointly. Markups are generally found to be pro-cyclical, although there is some evidence to suggest that this relationship is not as strong in industries that are open to the international economy.