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Understanding How Price Responds to Costs and Production

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Author Info
Mark Bils
Yongsung Chang

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Abstract

The importance of sticky prices in business cycle fluctuations has been debated for many years. But we argue, based on a large empirical literature from the 1950's and 60's, that it is necessary to distinguish the response of price to an increase in factor prices from its response to an increase in marginal cost generated by an expansion in production. Consistent with that earlier literature, we find for 450 U.S. manufacturing industries that prices do respond more to increases in costs driven by changes in factor prices than to increases in marginal cost precipitated by expansions in output. We explore two models that can potentially explain these findings. Both break the link between price and marginal cost, thereby generating what one might naively interpret as average-cost pricing. The first is driven by firms pricing to limit entry. The second is driven by firms pricing to limit non-price competition within their market.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7311.

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Date of creation: Aug 1999
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Publication status: published as Bils, Mark and Yongsugn Chang. "Understanding How Price Responds To Costs And Production," Carnegic-Rochester Conference Series on Public PolicyP, 2000, v52(1,Jun), 33-77.
Handle: RePEc:nbr:nberwo:7311

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E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert E. Hall, 1980. "Employment Fluctuations and Wage Rigidity," NBER Reprints 0092, National Bureau of Economic Research, Inc.
  2. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December. [Downloadable!] (restricted)
  3. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
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  4. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Blackwell Publishing, vol. 49(4), pages 517-31, October. [Downloadable!] (restricted)
  5. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 921-47, October. [Downloadable!] (restricted)
  6. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Virgiliu Midrigan, 2005. "Is Firm Pricing State or Time-Dependent? Evidence from US Manufacturing," Macroeconomics 0511005, EconWPA. [Downloadable!]
  2. Lundin, Magnus & Gottfries, Nils & Lindström, Tomas, 2004. "Price and Investment Dynamics: An Empirical Analysis of Plant Level Data," Working Paper Series 2004:7, Uppsala University, Department of Economics. [Downloadable!]
  3. Yash P. Mehra, 2004. "Predicting the recent behavior of inflation using output gap-based Phillips curves," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 65-88. [Downloadable!]
  4. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, exit and plant-level dynamics over the business cycle," Working Paper 0718, Federal Reserve Bank of Cleveland. [Downloadable!]
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  5. Yash P. Mehra, 2004. "The output gap, expected future inflation and inflation dynamics: another look," Working Paper 04-06, Federal Reserve Bank of Richmond. [Downloadable!]
  6. Anindya BANERJEE & Bill RUSSEL, 2002. "Inflation Measures of the Markup," Economics Working Papers ECO2002/15, European University Institute. [Downloadable!]
  7. Yoonsoo Lee, 2005. "The importance of reallocations in cyclical productivity and returns to scale: evidence from plant-level data," Working Paper 0509, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  8. Anindya Banerjee & Bill Russell, 2004. "Competition, the Lisbon Strategy and the Euro," Economics Working Papers ECO2004/32, European University Institute. [Downloadable!]
  9. Yash Mehra, 2004. "The Output Gap, Expected Future Inflation and Inflation Dynamics: Another Look," Topics in Macroeconomics, Berkeley Electronic Press, vol. 4(1), pages 1194-1194. [Downloadable!] (restricted)
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