Reexamining the De Loecker & Warzynski (2012) Method for Estimating Markups

De Loecker & Warzynski (2012) obtain the markup from the firm’s cost minimization problem by substituting in estimates of the output elasticity of a variable input and the disturbance that separates actual from planned output. We show, however, that consistently estimating the output elasticity and the disturbance using the procedure developed in Olley & Pakes (1996) and Levinsohn & Petrin (2003) generally requires observing and controlling for the markup. We analyze the resulting biases and discuss alternative approaches to estimation