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The cyclicality of Mark-ups and Profit Margins: Some Evidence for Manufacturing and Services

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  • Ian Small

Abstract

This paper uses industry and firm data to look at price cost mark-ups and firm profit margins in UK manufacturing and services. In particular it examines how they behave over the business cycle. It has two main findings. First, the estimated average mark-ups and the profit margin results both suggest that there is imperfect competition in manufacturing and services. Second, mark-ups are pro-cyclical, as are profit margins even after allowing for movements in their standard determinants. This suggests that price pressures may increase during recovery periods and decrease during recessions. One possible explanation for this is Kreps and Scheinkman's argument that the pro-cyclicality of capacity constraints means that firms move between Cournot and Bertrand competition over the cycle. The finding that mark-ups are pro- cyclical also raises doubts about macroeconomic models that assume that demand shocks may affect employment via counter-cyclical mark-ups.

Suggested Citation

  • Ian Small, 1997. "The cyclicality of Mark-ups and Profit Margins: Some Evidence for Manufacturing and Services," Bank of England working papers 72, Bank of England.
  • Handle: RePEc:boe:boeewp:72
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1997/wp72.pdf
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    References listed on IDEAS

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    Cited by:

    1. Salman Ahmad & Attiya Yasmin Javid, 2015. "Analysing the Price Cost Markup and Its Behaviour over the Business Cycles in Case of Manufacturing Industries of Pakistan," PIDE-Working Papers 2015:117, Pakistan Institute of Development Economics.
    2. Altomonte, Carlo & Nicolini, Marcella, 2012. "Economic integration and the dynamics of firms’ competitive behavior," Structural Change and Economic Dynamics, Elsevier, vol. 23(4), pages 383-402.
    3. Akbar Ullah & Ejaz Ghani & Attiya Y. Javed, 2013. "Market Power and Industrial Performance in Pakistan," PIDE-Working Papers 2013:88, Pakistan Institute of Development Economics.
    4. Dawid Herbert & Gemkow Simon & Harting Philipp & Kabus Kordian & Wersching Klaus & Neugart Michael, 2008. "Skills, Innovation, and Growth: An Agent-Based Policy Analysis," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 228(2-3), pages 251-275, April.
    5. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
    6. Herbert Dawid & Simon Gemkow & Philipp Harting & Michael Neugart, 2009. "On the Effects of Skill Upgrading in the Presence of Spatial Labor Market Frictions: An Agent-Based Analysis of Spatial Policy Design," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 12(4), pages 1-5.
    7. 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.

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