Capacity Utilization and Market Power
AbstractIn a monopolistic competition framework, we propose a dynamic model in which capacity underutilization ia a macroeconomic equilibrium feature relying on a diversity of microeconomic situations. Capacity underutilization follows from microeconomic demand uncertainty at the time firms must decide on their productive capacity. We settle a relationship between capacity utilization and markups via the effect of capacity utilization rate changes on firms’ market power. We show that such a relationship influences significantly the short run response of the economy to exogenous shocks. In particular, 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).
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1996006.
Date of creation: 01 Dec 1995
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