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Imperfect competition and the dynamics of mark-ups

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  • Erik Britton
  • Jens D J Larsen
  • Ian Small

Abstract

This paper investigates the behaviour of the mark-up of prices over marginal costs under two different assumptions about market structure. In the customer market model firms lower their mark-up when current output is low relative to future profits, foregoing current profits in order to capture future market share. In markets characterised by implicit collusion, firms lower their mark-ups when current output is high relative to future profits in order to lower the incentives to undercut the implicit cartel. Only the customer market model generates predictions consistent with UK evidence, but this in inconsistent with evidence from the United States. It may be necessary to use more than one model to explain all the facts.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp110.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 110.

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Date of creation: Feb 2000
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Handle: RePEc:boe:boeewp:110

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  14. Allison Holland & Andrew Scott, 1997. "The determinants of UK business cycles," Bank of England working papers 58, Bank of England.
  15. Ireland, Peter N., 1998. "Customer Flows, Countercyclical Markups, and the Output Effects of Technology Shocks," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 649-664, October.
  16. Haskel, Jonathan & Martin, Christopher & Small, Ian, 1995. "Price, Marginal Cost and the Business Cycle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(1), pages 25-41, February.
  17. Roeger, Werner, 1995. "Can Imperfect Competition Explain the Difference between Primal and Dual Productivity Measures? Estimates for U.S. Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 316-30, April.
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Citations

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Cited by:
  1. Nicoletta Batini & Richard Harrison & Stephen P. Millard, 2001. "Monetary policy rules for an open economy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Jens Larsen & Katharine Neiss & Fergal Shortall, 2002. "Factor utilisation and productivity estimates for the United Kingdom," Bank of England working papers 162, Bank of England.
  3. Hashmat Khan & Richhild Moessner, 2005. "Competitiveness, inflation, and monetary policy," Bank of England working papers 246, Bank of England.
  4. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2002. "The Pricing Behaviour of UK Firms," Discussion Papers 09, Monetary Policy Committee Unit, Bank of England.
  5. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
  6. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Working Papers 2007-006, Federal Reserve Bank of St. Louis.
  7. Célérier, C., 2009. "Forecasting inflation in France," Working papers 262, Banque de France.
  8. Ravi Balakrishnan & J David Lopez-Salido, 2002. "Understanding UK inflation: the role of openness," Bank of England working papers 164, Bank of England.
  9. Macallan, Clare & Millard, Stephen & Parker, Miles, 2008. "The cyclicality of mark-ups and profit margins for the United Kingdom: some new evidence," Bank of England working papers 351, Bank of England.
  10. Alastair Cunninghan & Andrew G. Haldane, 2002. "The Monetary Transmission Mechanism in the United Kingdom: Pass-Through and Policy Rules," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 12, pages 331-356 Central Bank of Chile.
  11. Faccini, Renato & Millard, Stephen & Zanetti, Francesco, 2011. "Wage rigidities in an estimated DSGE model of the UK labour market," Bank of England working papers 408, Bank of England.
  12. Ángel Estrada & David López-Salido, 2005. "Sectoral mark-up dynamics in Spain," Banco de Espa�a Working Papers 0503, Banco de Espa�a.

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