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Market Power and Inflation

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  • Robert S. Chirinko
  • Steven M. Fazzari

Abstract

Market power exercised by firms has become central to macroeconomics. Recent theoretical work highlights the importance of the relation between market power and inflation. We examine this relation for individual firms in eleven U.S. industries. Our econometric framework exploits restrictions from dynamic theory and information from financial markets to generate quantitative evidence on the responsiveness of market power to inflation. We find that inflation usually has a positive effect on market power. This relation is heterogeneous across the eleven industries, and statistically significant positive relations are concentrated in industries with little market power.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 277.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_277

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  1. Benabou, R., 1991. "Inflation and Markups: Theories and Evidence from the Retail Trade Sector," Working papers 587, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-77, November.
  3. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
  4. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  5. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  6. Rotemberg, Julio J. & Woodford, Michael, 1999. "The cyclical behavior of prices and costs," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 16, pages 1051-1135 Elsevier.
  7. 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.
  8. Robert S. Chirinko & Steven M. Fazzari, 1993. "Economic fluctuations, market power, and returns to scale: evidence from firm-level data," Research Working Paper 93-06, Federal Reserve Bank of Kansas City.
  9. Chirinko, Robert S., 1993. "Multiple capital inputs, Q, and investment spending," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 907-928.
  10. Laurence Ball & David Romer, 1993. "Inflation and the Informativeness of Prices," NBER Working Papers 4267, National Bureau of Economic Research, Inc.
  11. Pesaran, M. Hashem & Smith, Ron, 1995. "The role of theory in econometrics," Journal of Econometrics, Elsevier, vol. 67(1), pages 61-79, May.
  12. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  13. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
  14. 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.
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Cited by:
  1. David Bowman, 2003. "Market power and inflation," International Finance Discussion Papers 783, Board of Governors of the Federal Reserve System (U.S.).
  2. Andrea Vaona & Guido Ascari, 2008. "Regional Inflation Persistence: Evidence from Italy," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0807, USI Università della Svizzera italiana.
  3. Gaetano Antinolfi & David S. Kaplan, 2007. "Inflation and Establishment Turnover," Eastern Economic Journal, Eastern Economic Association, vol. 33(3), pages 317-341, Summer.
  4. Jonsson, Magnus & Palmqvist, Stefan, 2003. "Inflation, Markups and Monetary Policy," Working Paper Series 148, Sveriges Riksbank (Central Bank of Sweden).
  5. Jan Askildsen & Øivind Nilsen, 2010. "Markup cyclicality and input factor adjustments," Empirical Economics, Springer, vol. 38(2), pages 409-428, April.
  6. Christopher Bowdler & Eilev S. Jansen, 2004. "Testing for a time-varying price-cost markup in the Euro area inflation process," Working Paper Series 4004, Department of Economics, Norwegian University of Science and Technology, revised 11 May 2004.
  7. Asli Gunay & Kivilcim Metin-Ozcan & Erinc Yeldan, 2005. "Real wages, profit margins and inflation in Turkish manufacturing under post-liberalization," Applied Economics, Taylor & Francis Journals, vol. 37(16), pages 1899-1905.
  8. Nir Klein, 2011. "South Africa: The Cyclical Behavior of the Markups and its Implications for Monetary Policy," IMF Working Papers 11/204, International Monetary Fund.

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