Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence
AbstractDuring recessions, output prices seem to rise relative to wages and raw-material prices. One explanation is that imperfectly competitive firms compete less aggressively during recessions. That is, markups of price over marginal cost are countercyclical. The authors present a model of countercyclical markups based on capital-market imperfections. During recessions, liquidity-constrained firms boost short-run profits by raising prices to cut their investments in market share. The authors provide evidence from the supermarket industry in support of this theory. During regional and macroeconomic recessions, more financially constrained supermarket chains raise their prices relative to less financially constrained chains. Copyright 1996 by American Economic Association.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 86 (1996)
Issue (Month): 4 (September)
Other versions of this item:
- Judith A. Chevalier & David S. Scharfstein, 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence," NBER Working Papers 4614, National Bureau of Economic Research, Inc.
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