This paper estimates the price–marginal cost markup for U.S. manufacturing using a new methodology. Most existing techniques of estimating the markup are a variant on the Hall (1988) framework that involves manipulating the Solow Residual. However, this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate. By relaxing this assumption we are able to derive a generalized markup index, which, when estimated using manufacturing data, is highly countercyclical and decreasing in trend since the 1960s. When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry. Thus, increasing foreign competition in manufacturing has led to a decline in the industry's markup over time.

This paper develops a new approach for investigating the determinant of the mark-up of prices over costs. We estimate basic price equations around an expression for marginal cost that is derived from a cost minimisation problem, using a vector error correction approach to avoid endogeneity bias. Observed basic prices include the mark-up over marginal costs, and this mark-up is of interest to policymakers as an indicator of competition and ultimately as a determinant of the level of equilibrium employment. We look at the factors driving this mark-up, and in particular look at the role of EMU, as well as globalisation, the European Single Market and openness to trade and the introduction of the euro. We use a panel data set that includes both EMU and non-EMU members. The results indicate an important role for trade liberalisation in determining the mark-up, but openness itself and the introduction of the euro do not appear to have a significant role.

In standard microeconomic theory, short-run and long-run marginal costs are equal for production equipment with adjusted capacity. When the production of joint products from interdependent equipment is modeled with a linear program, this equality is no longer verified. The short-run marginal cost then takes on a left-hand value and a right-hand value which generally differ from the long-run marginal cost. In this article, we demonstrate and interpret the relationship existing between long-run marginal cost and shortrun marginal costs for a given finished product. That relationship is simply expressed as a function of marginal capacity adjustments (determined in the long run) and marginal values of capacities (determined in the short run).