Micro and Macro Perspectives on Production-Based Markups

We review the "production approach" to estimating markups-the ratio of price to marginal cost. Paired with increasingly rich microdata and advances in production function estimation, the method enables scalable analysis of markups across firms, industries, and time. We survey what economists need to know about the production approach, emphasizing both its promise and its fragility. Conceptually, empirically, and econometrically, the production-based markup is a residual-absorbing model misspecification, data limitations, and unobserved frictions. These challenges help explain why empirical results often diverge, including on whether markups have risen sharply in recent decades. We outline practical guidance for researchers and highlight directions for future work: improving transparency in reporting, validating production-based markups against demand-based and quasi-experimental estimates, and integrating firm level heterogeneity into macroeconomic models. The production approach is not a finished product, but it remains a uniquely powerful tool for studying market power and its implications for productivity, welfare, and macroeconomic dynamics.

Suggested citation:

Fernald, John, Amit Gandhi, Dimitrije Ruzic, and James Traina. 2025. "Micro and Macro Perspectives on Production-Based Markups." Federal Reserve Bank of San Francisco Working Paper 2025-20. https://doi.org/10.24148/wp2025-20