Understanding how price responds to costs and production
AbstractThe importance of sticky prices in business cycle fluctuations has been debated for many years. But we argue, based on a large empirical literature from the 1950's and 60's, that it is necessary to distinguish the response of price to an increase in factor prices from its response to an increase in marginal cost generated by an expansion in production. Consistent with that earlier literature, we find for 450 U.S. manufacturing industries that prices do respond more to increases in costs driven by changes in factor prices than to increases in marginal cost precipitated by expansions in output. We explore two models that can potentially explain these findings. Both break the link between price and marginal cost, thereby generating what one might naively interpret as average-cost pricing. The first is driven by firms pricing to limit entry. The second is driven by firms pricing to limit non-price competition within their market.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.
Volume (Year): 52 (2000)
Issue (Month): 1 (June)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jme
Other versions of this item:
- Mark Bils & Yongsung Chang, 1999. "Understanding How Price Responds to Costs and Production," NBER Working Papers 7311, National Bureau of Economic Research, Inc.
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
- Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
- Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
- Basu, Susanto & Fernald, John G, 1997.
"Returns to Scale in U.S. Production: Estimates and Implications,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 249-83, April.
- Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
- Hall, Robert E, 1988.
"The Relation between Price and Marginal Cost in U.S. Industry,"
Journal of Political Economy,
University of Chicago Press, vol. 96(5), pages 921-47, October.
- Robert E. Hall, 1988. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
- Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.