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Market Structure and Cyclical Fluctuations in U.S. Manufacturing

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  • Ian Domowitz
  • R. Glenn Hubbard
  • Bruce C. Petersen

Abstract

The relevance of imperfect competition for models of aggregate economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization. Measuring properly the size of industry markups of price over marginal cost is important both for assessing the role of market structure and for determining the extent to which excess capacity is a significant feature accompanying imperfect competition in American industry. Using a panel data set on four-digit Census manufacturing industries, this paper expands recent work by Robert Hall on the importance of market structure for understanding cyclical fluctuations. We outline a methodology for estimating industry markups of price over cost and the influence of market structure on cyclical movements in total factor productivity. While we find evidence to support the proposition that price exceeds marginal cost in U.S. manufacturing, our results offer only limited support for the notion that markups are importantly related to differences in industry concentration, though the effect of unionization is important. Concentration effects are important only in industries producing durable goods or differentiated consumer goods. In addition, much of the estimated markup of price over marginal cost is accounted for by fixed costs related to overhead labor, advertising, and central office expenses; we do not find compelling evidence of substantial evidence of excess capacity in most industries.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2115.

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Date of creation: Dec 1986
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Publication status: published as Domowitz, Ian, R. Glenn Hubbard and Bruce C. Petersen. "Market Structures and Cyclical Fluctuations in U.S. Manufacturing," Review of Economics and Statistics, Vol. LXX, No. 1, pp. 55-66 (February 1988).
Handle: RePEc:nbr:nberwo:2115

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  1. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  2. Karier, Thomas M, 1985. "Unions and Monopoly Profits," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 34-42, February.
  3. Gisser, Micha, 1984. "Price Leadership and Dynamic Aspects of Oligopoly in U.S. Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1035-48, December.
  4. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August.
  5. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
  6. Alberts, William W, 1984. "Do Oligopolists Earn "Noncompetitive" Rates of Return?," American Economic Review, American Economic Association, vol. 74(4), pages 624-32, September.
  7. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Business Cycles and the Relationship Between Concentration and Price-Cost Margins," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 1-17, Spring.
  8. Richard B. Freeman & James L. Medoff, 1979. "New estimates of private sector unionism in the United States," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 32(2), pages 143-174, January.
  9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  10. Caves, Richard E., 1985. "International trade and industrial organization: Problems, solved and unsolved," European Economic Review, Elsevier, vol. 28(3), pages 377-395, August.
  11. Michael A. Salinger, 1984. "Tobin's q, Unionization, and the Concentration-Profits Relationship," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 159-170, Summer.
  12. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
  13. Olivier J. Blanchard & Nobuhiro Kiyotaki, 1985. "Monopolistic Competition, Aggregate Externalities and real Effects of Nominal Money," Working papers 401, Massachusetts Institute of Technology (MIT), Department of Economics.
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