Vertical integration, input contracts and the margins - concentration relationship
In recent years it has become common when specifying empirical price cost margins to use net output as opposed to the more usual gross output in the denominator. It has been noted that with gross output as the denominator the point estimate on concentration from a regression of margins on concentration is lower than with net output as the denominator and the estimate is frequently insignificant. The possible explanations that have been put forward to explain this empirical phenomenon are discussed and evidence is presented using data from the UK Census of Production and the UK Input Output tables. Neither theoretical nor empirical justification is found for the use of the adjusted margin but instead, it is suggested that the empirical phenomenon is caused by the omission of appropriate variables to control for contracting relations in purchasing intermediate inputs.