Market power in the Mexican manufacturing sector. Estimation with instrumental variables

Abstract

This paper uses instrumental variables to estimate market power in the manufacturing sector at the two digit level for the 1970-1990 period. Similarly to Hall (1988), the identification assumption states that the rate of growth of total factor productivity is not intrinsically procyclical. The fact that observed productivity is procyclical is due to the presence of market power. The assumptions of optimization and constant returns to scale are maintained in order to be able to estimate the degree of market power. The results show ample evidence of market power in the Mexican manufacturing sector.