Price-cost margin in the pharmaceutical industry. Empirical evidence from Finland.

This contribution estimates the price-cost margin in the Finnish pharmaceutical industry. The estimation is based on the method developed by Hall who shows that under constant returns to scale total factor productivity growth depends on the growth of output-capital ratio if the market is imperfectly competitive. Measurement of the price-cost margin is based on this theoretical result. We utilize data on the Finnish pharmaceutical industry. The data cover the years 1975-1999 and include information on output, labor hours, and capital stock. The results show that the estimated price-cost margin is in the range 0.59-0.67, which is close to the estimates obtained in the United States market.