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Contents Introduction

This paper estimates and compares the price-cost margin (that is, markup ratio minus one) for both domestic markets and export markets in Japan’s iron and steel industry from 1986 to 1998, with system estimation of profit maximization conditions under the production technology of translog cost function. First, this paper found that both domestic and export markets in Japan’s iron and steel industry were imperfectly competitive, setting prices 11.6 percent in excess of corresponding marginal costs, so that the degrees of market power were the same in both domestic and export markets. Second, this paper also found that the cost elasticity of the products sold at export markets was smaller than at domestic markets, implying that the production cost at the margin for export markets was lower than for domestic markets. Thus export activity generates a diversification benefit for Japan’s iron and steel industry through the differences in cost structure for domestic and export products.