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Imperfect competition and the dynamics of mark-ups

Author

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  • Erik Britton
  • Jens D J Larsen
  • Ian Small

Abstract

This paper investigates the behaviour of the mark-up of prices over marginal costs under two different assumptions about market structure. In the customer market model firms lower their mark-up when current output is low relative to future profits, foregoing current profits in order to capture future market share. In markets characterised by implicit collusion, firms lower their mark-ups when current output is high relative to future profits in order to lower the incentives to undercut the implicit cartel. Only the customer market model generates predictions consistent with UK evidence, but this in inconsistent with evidence from the United States. It may be necessary to use more than one model to explain all the facts.

Suggested Citation

  • Erik Britton & Jens D J Larsen & Ian Small, 2000. "Imperfect competition and the dynamics of mark-ups," Bank of England working papers 110, Bank of England.
  • Handle: RePEc:boe:boeewp:110
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    References listed on IDEAS

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    Cited by:

    1. Francesco Zanetti, 2014. "Labour Market and Monetary Policy Reforms in the UK: a Structural Interpretation of the Implications," Economics Series Working Papers 702, University of Oxford, Department of Economics.
    2. Alastair Cunninghan & Andrew G. Haldane, 2002. "The Monetary Transmission Mechanism in the United Kingdom: Pass-Through and Policy Rules," Central Banking, Analysis, and Economic Policies Book Series,in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 12, pages 331-356 Central Bank of Chile.
    3. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 215-232.
    4. Jens Larsen & Katharine Neiss & Fergal Shortall, 2002. "Factor utilisation and productivity estimates for the United Kingdom," Bank of England working papers 162, Bank of England.
    5. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
    6. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2059-2094.
    7. Hashmat Khan & Richhild Moessner, 2005. "Competitiveness, inflation, and monetary policy," Bank of England working papers 246, Bank of England.
    8. Železník Martin, 2011. "Labor Market Regulation and its Characteristics: Comparison Between Czech Republic and Austria," Review of Economic Perspectives, De Gruyter Open, vol. 11(2), pages 93-120, January.
    9. Macallan, Clare & Millard, Stephen & Parker, Miles, 2008. "The cyclicality of mark-ups and profit margins for the United Kingdom: some new evidence," Bank of England working papers 351, Bank of England.
    10. Ravi Balakrishnan & J David Lopez-Salido, 2002. "Understanding UK inflation: the role of openness," Bank of England working papers 164, Bank of England.
    11. Célérier, C., 2009. "Forecasting inflation in France," Working papers 262, Banque de France.
    12. Ángel Estrada & David López-Salido, 2005. "Sectoral mark-up dynamics in Spain," Working Papers 0503, Banco de España;Working Papers Homepage.
    13. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2002. "The Pricing Behaviour of UK Firms," Discussion Papers 09, Monetary Policy Committee Unit, Bank of England.
    14. Faccini, Renato & Millard, Stephen & Zanetti, Francesco, 2011. "Wage rigidities in an estimated DSGE model of the UK labour market," Bank of England working papers 408, Bank of England.
    15. Giuliana Battisti & P. Stoneman, 2007. "The prices of material and intermediate inputs in UK manufacturing: identifying the contributions of world prices and domestic factor costs," Applied Economics, Taylor & Francis Journals, vol. 39(7), pages 859-882.
    16. Christa N. Brunnschweiler & Pietro F. Peretto & Simone Valente, 2017. "Wealth creation, wealth dilution and population dynamics," University of East Anglia School of Economics Working Paper Series 2017-04, School of Economics, University of East Anglia, Norwich, UK..

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