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Capacity Utilization and Market Power

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Author Info

  • Fagnart, J.-Fr.

    (University of Copenhagen)

  • Licandro, O.

    (FEDEA, Universidad Carlos III de Madrid)

  • Sneessens, H. R.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); Université catholique de Lille)

Abstract

In 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 Info

Paper 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.

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Length: 21
Date of creation: 01 Dec 1995
Date of revision:
Handle: RePEc:ctl:louvir:1996006

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References

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  1. Franck PORTIER, 1995. "Business Formation and Cyclical Markups in the French Business Cycle," Annales d'Economie et de Statistique, ENSAE, issue 37-38, pages 411-440.
  2. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  3. Sneessens, Henri R., 1987. "Investment and the inflation-unemployment tradeoff in a macroeconomic rationing model with monopolistic competition," European Economic Review, Elsevier, vol. 31(3), pages 781-808, April.
  4. Jean-Pierre LAFFARGUE, 1990. "Résolution d'un modèle macroéconomique avec anticipations rationnelles," Annales d'Economie et de Statistique, ENSAE, issue 17, pages 97-119.
  5. 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.
  6. Cooley, Thomas F & Hansen, Gary D & Prescott, Edward C, 1995. "Equilibrium Business Cycles with Idle Resources and Variable Capacity Utilization," Economic Theory, Springer, vol. 6(1), pages 35-49, June.
  7. Gali, J., 1991. "Monopolistic Competition, Business Cycles and the Composition of Aggregate Demand," Papers 92-03, Columbia - Graduate School of Business.
  8. de la Croix, David & Fagnart, Jean-Francois, 1995. "Underemployment of production factors in a forward-looking model," Labour Economics, Elsevier, vol. 2(2), pages 131-159, June.
  9. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, vol. 86(5), pages 1154-74, December.
  10. de la Croix, David & Licandro, Omar, 1993. "Irreversibility, Uncertainty and Underemployment Equilibria," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1994028, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Oct 1994.
  11. Omar LICANDRO, 1995. "A Non-Walrasian General Equilibrium Model with Monopolistic Competition and Wage Bargaining," Annales d'Economie et de Statistique, ENSAE, issue 37-38, pages 237-253.
  12. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-73, April.
  13. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 711-734, May.
  14. Benassy, Jean-Pascal, 1989. "Market Size and Substitutability in Imperfect Competition: A Bertrand-Edgeworth-Chamberlin Model," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 217-34, April.
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Cited by:
  1. Horst Entorf & Henri R. Sneessens, 2000. "Aggregation in models with quantity constraints: The CES aggregation function," Empirical Economics, Springer, vol. 25(1), pages 35-59.
  2. Sudipto Sarkar, 2009. "A real-option rationale for investing in excess capacity," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 119-133.
  3. Kalyuzhnova, Yelena & Vagliasindi, Maria, 2006. "Capacity utilization of the Kazakhstani firms and the Russian financial crisis: A panel data analysis," Economic Systems, Elsevier, vol. 30(3), pages 231-248, October.
  4. repec:hal:journl:halshs-00118639 is not listed on IDEAS

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