Constant Returns and Small Markups in U.S. Manufacturing

Abstract

We reexamine Robert Hall's recent finding of increasing returns in U.S. manufacturing. With gross output data at roughly the two-digit SIC level, we estimate that returns to scale are close to constant. We show why, with imperfect competition, value-added data lead to biased estimates of returns to scale, and hence why Hall's results are easily explained. We show how to control for value-added bias by combining Hall's data with data on intermediate input use: using Hall's data with this correction, returns to scale again appear to be constant. We also estimate that the average markup of price over marginal cost is about 15 percent.