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Do markup dynamics reflect fundamentals or changes in conduct?

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Author Info
Juselius , Mikael () (Universtiy of Helsnki RUSEG and Hanken School of Economics and HECER)
Kim, Moshe () (Universitat Pompeu Fabra)
Ringbom, Staffan () (Hanken School of Economicsn and HECER)
Abstract

Persistent shifts in equilibria are likely to arise in oligopolistic markets and may be detrimental to the measurement of conduct, related markups and intensity of competition. We develop a cointegrated VAR (vector autoregression) based approach to detect long-run changes in conduct when data are difference stationary. Importantly, we separate the components in markups which are exclusively related to long-run changes in conduct from those explained solely by fundamentals. Our approach does not require estimation of markups and conduct directly, thereby avoiding complex problems in existing methodologies related to multiple and changing equilibria. Results from applying the model to US and five major European banking sectors indicate substantially different behavior of conventional raw markups and conduct-induced markups.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 12/2009.

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Length: 45 pages
Date of creation: 22 Apr 2009
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Handle: RePEc:hhs:bofrdp:2009_012

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Related research
Keywords: markups; cointegration; VAR; macroeconomic fundamentals; competition; banking;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
G20 - Financial Economics - - Financial Institutions and Services - - - General
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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