Joint identification of monopoly and monopsony power

Abstract

The article presents a generalization of an identification scheme of a monopolistic markup proposed by De Loecker and Warzynski (2012). We showed the relation between a price markup and factor wedges arising either due to firm's monopsony power and/or factor adjustment costs. The joint estimation of both kind of wedges (or price markup only) is subject to an identification problem and we discussed the possible restrictions identifying all wedges jointly. We argue that the identification restriction implicitly imposed in the empirical literature is reasonable, but in specific circumstances (or with additional information introduced) different choices may lead to better estimates of not only price markups, but also factor wedges if available data allow to measure multiple variable production factors.