Testing the Production Approach to Markup Estimation

Under the production approach to markup estimation, any flexible input should recover the markup. I test this implication using four manufacturing censuses and store-level data from a US retailer, and overwhelmingly reject that markups estimated using labor and materials have the same distribution. For every dataset, markups estimated using labor are negatively correlated with markups using materials, exhibit greater dispersion, and have opposite time trends. Non-neutral productivity differences can reconcile these findings. I develop a flexible cost share estimator to model such heterogeneity. Using this estimator, markups estimated with different inputs are positively correlated in the cross-section and time series