Capacity utilization dynamics and market power

In an intertemporal general equilibrium model with imperfect competition, we settle a relationship between factor utilization and markups, via the effect of capacity utilization rate changes on firms' market power when the demand for goods is uncertain. When competition is imperfect, the existence of capacity constraints introduces a distinction between demand and sales price elasticities. At given demand price elasticity, the price elasticity of sales will be smaller the larger the aggregate capacity utilization rateo In such a framework, capacity utilization aifects the propagation mechanism of exogenous disturbances in two ways. The first effect is similar to the effect that bottlenecks and stockouts would have in a perfectly competitive setup; the second effect is related to imperfect competition and works through market power and optimal markup changes. We study these interactions and their implications for the dynamic behavior of sorne key macro variables in response to various "structural" changes. We show that the same shock can have quite different short run effects depending on the characteristics of the initial stationary state (low or high capacity utilization rate).