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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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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. Chirinko, R S & Fazzari, S, 1994. "Economic Fluctuations, Market Power, and Returns to Scale: Evidence from Firm-Level Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(1), pages 47-69, Jan.-Marc.
  2. 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.
  3. Pesaran, M. Hashem & Smith, Ron, 1995. "The role of theory in econometrics," Journal of Econometrics, Elsevier, vol. 67(1), pages 61-79, May.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Laurence Ball & David Romer, 1993. "Inflation and the Informativeness of Prices," NBER Working Papers 4267, National Bureau of Economic Research, Inc.
  9. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
  10. 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.
  11. 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.
  12. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  13. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  14. 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.
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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. Gaetano Antinolfi & David S. Kaplan, 2007. "Inflation and Establishment Turnover," Eastern Economic Journal, Eastern Economic Association, vol. 33(3), pages 317-341, Summer.
  3. 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.
  4. 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.
  5. Andrea Vaona & Guido Ascari, 2010. "Regional Inflation Persistence: Evidence from Italy," Working Papers 04/2010, University of Verona, Department of Economics.
  6. Jonsson, Magnus & Palmqvist, Stefan, 2003. "Inflation, Markups and Monetary Policy," Working Paper Series 148, Sveriges Riksbank (Central Bank of Sweden).
  7. Jan Askildsen & Øivind Nilsen, 2010. "Markup cyclicality and input factor adjustments," Empirical Economics, Springer, vol. 38(2), pages 409-428, April.
  8. Asli Gunay & Kivilcim Metin-Ozcan & Erinc Yeldan, 2005. "Real wages, profit margins and inflation in Turkish manufacturing under post-liberalization," Applied Economics, Taylor and Francis Journals, vol. 37(16), pages 1899-1905.

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