Markup Estimation Using Production and Demand Data: An Application to the U.S. Brewing Industry

Abstract

We compare and combine two distinct approaches to estimating market power in the U.S. brewing industry—one based on production data, the other on demand. Both methods produce similar estimates of average markups and reveal a recent upward trend. We then combine the two approaches in two ways. First, we replace conventional instruments in demand estimation with a moment involving a production-based markup estimate, yielding similar results. We then evaluate the common (but controversial) assumption that retail markets operate competitively, finding that demand-based markups recovered with the assumption of competitive retail markets align with production-based estimates, as long as downstream costs are accounted for.