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Capacity utilization and market power

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  • J-Fr. Fagnart
  • Omar Licandro
  • H. R. Sneessens

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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Paper provided by FEDEA in its series Working Papers with number 96-12.

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Handle: RePEc:fda:fdaddt:9612

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References

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  1. Jean-Pierre LAFFARGUE, 1990. "Résolution d'un modèle macroéconomique avec anticipations rationnelles," Annales d'Economie et de Statistique, ENSAE, ENSAE, issue 17, pages 97-119.
  2. Omar LICANDRO, 1995. "A Non-Walrasian General Equilibrium Model with Monopolistic Competition and Wage Bargaining," Annales d'Economie et de Statistique, ENSAE, ENSAE, issue 37-38, pages 237-253.
  3. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1990. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
  4. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  5. Cooley, Thomas F & Hansen, Gary D & Prescott, Edward C, 1995. "Equilibrium Business Cycles with Idle Resources and Variable Capacity Utilization," Economic Theory, Springer, Springer, vol. 6(1), pages 35-49, June.
  6. Benassy, Jean-Pascal, 1989. "Market Size and Substitutability in Imperfect Competition: A Bertrand-Edgeworth-Chamberlin Model," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(2), pages 217-34, April.
  7. Craig Burnside & Martin Eichenbaum, 1994. "Factor Hoarding and the Propagation of Business Cycles Shocks," NBER Working Papers 4675, National Bureau of Economic Research, Inc.
  8. Franck PORTIER, 1995. "Business Formation and Cyclical Markups in the French Business Cycle," Annales d'Economie et de Statistique, ENSAE, ENSAE, issue 37-38, pages 411-440.
  9. de la Croix, David & Fagnart, Jean-Francois, 1995. "Underemployment of production factors in a forward-looking model," Labour Economics, Elsevier, Elsevier, vol. 2(2), pages 131-159, June.
  10. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
  11. Gali Jordi, 1994. "Monopolistic Competition, Business Cycles, and the Composition of Aggregate Demand," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 73-96, June.
  12. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 19(4), pages 711-734, May.
  13. Sneessens, Henri R., 1987. "Investment and the inflation-unemployment tradeoff in a macroeconomic rationing model with monopolistic competition," European Economic Review, Elsevier, Elsevier, vol. 31(3), pages 781-808, April.
  14. de la Croix, David & Licandro, Omar, 1993. "Irreversibility, Uncertainty and Underemployment Equilibria," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 1994028, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Oct 1994.
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Cited by:
  1. Sudipto Sarkar, 2009. "A real-option rationale for investing in excess capacity," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 30(2), pages 119-133.
  2. repec:hal:journl:halshs-00118639 is not listed on IDEAS
  3. Entorf, Horst & Sneessens, Henri R., 1998. "Aggregation in Models with Quantity Constraints: The CES Aggregation Function," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 1999008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  4. Kalyuzhnova, Yelena & Vagliasindi, Maria, 2006. "Capacity utilization of the Kazakhstani firms and the Russian financial crisis: A panel data analysis," Economic Systems, Elsevier, Elsevier, vol. 30(3), pages 231-248, October.

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