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Price-Cost Margins, Fixed Costs and Excess Profits

Author

Listed:
  • Filip Abraham
  • Yannick Bormans
  • Jozef Konings
  • Werner Roeger
Abstract
This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a thirty-year panel of Belgian firms, we estimate price-cost margins, as a fraction of sales, of 25.4% on average, which can be decomposed between fixed costs of 22.9% and excess profits of 2.5%. Belgian price-cost margins have declined (−5.9%) in the past three decades due to a combination of falling fixed costs (−4.0%) and decreasing excess profits (−1.9%), suggesting that output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.

Suggested Citation

  • Filip Abraham & Yannick Bormans & Jozef Konings & Werner Roeger, 2024. "Price-Cost Margins, Fixed Costs and Excess Profits," The Economic Journal, Royal Economic Society, vol. 134(663), pages 2655-2684.
    • Handle: RePEc:oup:econjl:v:134:y:2024:i:663:p:2655-2684.
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    File URL: http://hdl.handle.net/10.1093/ej/ueae037
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    Cited by:

    1. Daniel P. Monteiro, 2025. "A prism decomposition of euro area interest rates," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 24(1), pages 7-29, June.
    2. Mirko Licchetta & Vitor Martins & Bořek Vašíček, 2025. "Selected macroeconomic and social aspects of housing affordability," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 24(1), pages 31-39, June.
    3. Mirko Licchetta & Giovanni Mattozzi, 2025. "Corporate margins and inflation during the post COVID-19 period in the euro area," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 24(1), pages 41-54, June.

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