"In the standard case of a price-taking (competitive) firm, the revenue elasticity with respect to an input is equal to the output elasticity. This is because the firm cannot influence the price it receives. So a 1% increase in input maybe leads to a 1% increase in output. This must lead to a 1% increase in revenue... when a firm has market power, this equivalence breaks down. If the firm increases its output by 1%, this will lead to a decrease in price. So, revenue will increase by less than 1%."
Something very obvious must escape me, but I cannot get around the idea that, if a firm faces a perfectly competitive market, its price will remain unchanged, but if it has market power, its price will decrease. Shouldn't the opposite apply?
It's a great question. I agree there is a little tension here depending on how you think about it. It may be helpful to flip. What happens if the firm decides to sell a few less units? For the competitive firm, their quantity (on the margin) does not affect the price. The price would not rise. The demand curve they are facing is flat. A firm with market power can raise prices if it sells fewer. That's exactly what we mean by market power. It can raise prices by decreasing output.
They shouldn't if you have quantity data. They would show up in you just have input expenditures. That's not a problem if they are uniform across firms through.
"In the standard case of a price-taking (competitive) firm, the revenue elasticity with respect to an input is equal to the output elasticity. This is because the firm cannot influence the price it receives. So a 1% increase in input maybe leads to a 1% increase in output. This must lead to a 1% increase in revenue... when a firm has market power, this equivalence breaks down. If the firm increases its output by 1%, this will lead to a decrease in price. So, revenue will increase by less than 1%."
Something very obvious must escape me, but I cannot get around the idea that, if a firm faces a perfectly competitive market, its price will remain unchanged, but if it has market power, its price will decrease. Shouldn't the opposite apply?
It's a great question. I agree there is a little tension here depending on how you think about it. It may be helpful to flip. What happens if the firm decides to sell a few less units? For the competitive firm, their quantity (on the margin) does not affect the price. The price would not rise. The demand curve they are facing is flat. A firm with market power can raise prices if it sells fewer. That's exactly what we mean by market power. It can raise prices by decreasing output.
Do VAT and other taxes affect the markups? In South Africa in the 80s we had GST of 8%, today we have VAT of 15%
They shouldn't if you have quantity data. They would show up in you just have input expenditures. That's not a problem if they are uniform across firms through.