The Cyclical Nature of Markups in Canadian Manufacturing: A Production Theory Approach

In this paper the effects of cost and demand characteristics on the magnitude and cyclical behaviour of markups in Canadian manufacturing are measured within a production theory framework. Price to marginal cost ratios for various manufacturing industries are computed, and the impact on their secular and cyclical trends from changes in capacity utilization, scale economies, variable input prices, import competition, unemployment and other exogenous market and technological determinants are explored using adjusted markup indexes and elasticities. The measured price margins seem weakly procyclical. Further, evaluation of the determinants of these cycles suggests that the procyclical nature of markups is primarily related to exogenous factors affecting costs such as energy price "shocks," and that cost characteristics underlying scale economies provide a countercyclical influence that counteracts the profitability arising from markups. Copyright 1994 by John Wiley & Sons, Ltd.