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Understanding how price responds to costs and production

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  • Bils, Mark
  • Chang, Yongsung

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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  • Bils, Mark & Chang, Yongsung, 2000. "Understanding how price responds to costs and production," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 33-77, June.
  • Handle: RePEc:eee:crcspp:v:52:y:2000:i:1:p:33-77
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    Cited by:

    1. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2008. "Cross-sectoral variation in firm-level idiosyncratic risk," Working Paper 0812, Federal Reserve Bank of Cleveland.
    2. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, Exit, and Plant-Level Dynamics over the Business Cycle," Working Papers 08-17, Center for Economic Studies, U.S. Census Bureau.
    3. Virgiliu Midrigan, 2005. "Is Firm Pricing State or Time-Dependent? Evidence from US Manufacturing," Macroeconomics 0511005, EconWPA.
    4. Eugenio Gaiotti & Alessandro Secchi, 2004. "Is there a cost channel of monetary policy transmission? An investigation into the pricing behaviour of 2,000 firms," Temi di discussione (Economic working papers) 525, Bank of Italy, Economic Research and International Relations Area.
    5. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2015. "Cross Sectoral Variation in the Volatility of Plant Level Idiosyncratic Shocks," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 1-29, March.
    6. Yash P. Mehra, 2004. "The output gap, expected future inflation and inflation dynamics: another look," Working Paper 04-06, Federal Reserve Bank of Richmond.
    7. Matteo Bugamelli & Silvia Fabiani & Enrico Sette, "undated". "The age of the dragon: Chinese competition and the pricing behavior of the Italian firms," Working Papers 4, Department of the Treasury, Ministry of the Economy and of Finance.
    8. Faiz ur, rehman & Wasim, shahid malik, 2010. "A structural VAR (SVAR) approach to cost channel of monetary policy," MPRA Paper 32349, University Library of Munich, Germany, revised 09 Feb 2011.
    9. 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.
    10. Banerjee, Anindya & Russell, Bill, 2005. "Inflation and measures of the markup," Journal of Macroeconomics, Elsevier, pages 289-306.
    11. Olivier Blanchard, 2009. "The State of Macro," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 209-228, May.
    12. Matteo Bugamelli & Silvia Fabiani & Enrico Sette, 2010. "The pro-competitive effect of imports from China: an analysis of firm-level price data," Temi di discussione (Economic working papers) 737, Bank of Italy, Economic Research and International Relations Area.
    13. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
    14. Krogscheepers, Corris & Gossel, Sean Joss, 2015. "Input cost and international demand effects on the production of platinum group metals in South Africa," Resources Policy, Elsevier, vol. 45(C), pages 193-201.
    15. Erol, Turan, 2003. "Capital structure and output pricing in a developing country," Economics Letters, Elsevier, vol. 78(1), pages 109-115, January.
    16. Erol, Turan, 2005. "Corporate debt and output pricing in developing countries: Industry-level evidence from Turkey," Journal of Development Economics, Elsevier, pages 503-520.
    17. Bertil Holmlund, 2004. "Sickness Absence and Search Unemployment," CESifo Working Paper Series 1227, CESifo Group Munich.
    18. 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.
    19. Banerjee, Anindya & Russell, Bill, 2005. "Inflation and measures of the markup," Journal of Macroeconomics, Elsevier, pages 289-306.
    20. repec:eee:moneco:v:92:y:2017:i:c:p:112-129 is not listed on IDEAS
    21. Saygın Şahinöz & Bedriye Saraçoğlu, 2011. "How do firms adjust their prices in Turkey? Micro-level evidence," Empirical Economics, Springer, pages 601-621.
    22. Banerjee, Anindya & Russell, Bill, 2004. "A reinvestigation of the markup and the business cycle," Economic Modelling, Elsevier, vol. 21(2), pages 267-284, March.

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    JEL classification:

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

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