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Cyclical Markups: Theories and Evidence

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  • Julio J. Rotemberg
  • Michael Woodford

Abstract

If changes in aggregate demand were an important source of macroeconomic fluctuations, real wages would be countercyclical unless markups of price over marginal cost were themselves countercyclical. We thus examine three theories of markup variation at cyclical frequencies. The first assumes only that the elasticity of demand is a function of the level of output. In the second, firma face a tradeoff between exploiting their existing customers and attracting new customers. Markups then depend also on rates of return and future sales expectations; a high rate of return or expectations of low sales growth lead firms to assign a lower value to future revenues from new customers. Firma thus raise prices and markups. In the third theory, markups are chosen to ensure that no one deviates from an (implicitly) collusive understanding. Increases in rates of return or pessimistic expectations then lead firms to be less concerned with future punishments so that markups fall. Aggregate post-war data from the U.S. are moat consistent with the predictions of the implicit collusion model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3534.

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Date of creation: Dec 1990
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Publication status: published as Blanchard, O.J. and S. Fischer (eds.) NBER Macroeconomics Annual 1991. Cambridge: MIT Press, 1991.
Handle: RePEc:nbr:nberwo:3534

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  1. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc.
  2. Robert B. Barsky & Gary Solon, 1989. "Real Wages Over The Business Cycle," NBER Working Papers 2888, National Bureau of Economic Research, Inc.
  3. Blanchard, O. & Rhee, C. & Summers, L., 1990. "The Stock Market, Profit And Investment," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 233, University of Rochester - Center for Economic Research (RCER).
  4. Gallant, A. Ronald & Jorgenson, Dale W., 1979. "Statistical inference for a system of simultaneous, non-linear, implicit equations in the context of instrumental variable estimation," Journal of Econometrics, Elsevier, Elsevier, vol. 11(2-3), pages 275-302.
  5. Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc.
  6. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 55-66, February.
  7. Parsons, Donald O, 1973. "Quit Rates Over Time: A Search and Information Approach," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 390-401, June.
  8. Gottfries, Nils, 1986. " Price Dynamics of Exporting and Import-Competing Firms," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 88(2), pages 417-36.
  9. Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, American Economic Association, vol. 76(3), pages 390-407, June.
  11. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, Elsevier, vol. 39(1), pages 191-225, June.
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Cited by:
  1. Barr, Tavis & Roy, Udayan, 2008. "The effect of labor market monopsony on economic growth," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(4), pages 1446-1467, December.
  2. Jahangir Aziz & Luc Leruth, 1999. "Cyclical Effects of the Composition of Government Purchases," Macroeconomics, EconWPA 9902007, EconWPA.
  3. Juan José Echavarría & Enrique López & Sergio Ocampo & Norberto Rodríguez, 2011. "Choques, instituciones laborales y desempleo en Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, BANCO DE LA REPÚBLICA - ESPE.
  4. Fabio Ghironi, 2000. "Towards New Open Economy Macroeconometrics," Boston College Working Papers in Economics, Boston College Department of Economics 469, Boston College Department of Economics.
  5. AZIZ, Jahangir & LERUTH, Luc, 1999. "Cyclical effects of the composition of government purchases," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1999032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics, Boston College Department of Economics 466, Boston College Department of Economics, revised 30 Oct 2000.
  7. Fabio Ghironi, 2000. "U.S.-Europe Economic Interdependence and Policy Transmission," Boston College Working Papers in Economics, Boston College Department of Economics 470, Boston College Department of Economics.
  8. Fabio Ghironi, 2000. "Understanding Macroeconomic Interdependence: Do We Really Need to Shut Off the Current Account?," Boston College Working Papers in Economics, Boston College Department of Economics 465, Boston College Department of Economics, revised 14 Aug 2003.
  9. Andrew John & Russell Cooper, 2000. "Imperfect competition and macroeconomics : Theory and quantitative implications," Cahiers d'Économie Politique, Programme National Persée, Programme National Persée, vol. 37(1), pages 289-328.

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