It is well known that under the assumptions of constant returns to scale, perfect competition, and the absence of factor hoarding, primal and dual productivity measures should be highly correlated. The apparent lack of correlation is usually attributed to fixed factors of production. In this paper I propose an alternative explanation by relaxing the assumption of perfect competition. By controlling for the presence of a markup component, I demonstrate that both productivity measures are in fact highly correlated for U.S. manufacturing. The analysis also provides an alternative method of estimating a markup of prices over marginal cost that avoids certain difficulties inherent in some existing methods of estimation.

It is well known that under the assumptions of constant returns to scale, perfect competition, and the absence of factor hoarding, primal and dual productivity measures should be highly correlated. The apparent lack of correlation is usually attributed to fixed factors of production. In this paper I propose an alternative explanation by relaxing the assumption of perfect competition. By controlling for the presence of a markup component, I demonstrate that both productivity measures are in fact highly correlated for U.S. manufacturing. The analysis also provides an alternative method of estimating a markup of prices over marginal cost that avoids certain difficulties inherent in some existing methods of estimation.