Estimation of market power in a nonrenewable resource industry

In nonrenewable resource industries, the existence of a markup of price over marginal market cost may reflect the existence of an implicit user cost for the resource rather than market power. We show that valid estimates of market power can be obtained by the joint estimation of a restricted cost function and an inverse supply relation. Estimation of the model with data for the largest firm in the international nickel industry indicates that output price substantially exceeded marginal market cost, with most of the difference due to the exercise of market power rather than the user cost of the resource.