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Price Setting In The Argentine And Colombian Manufacturing Industry

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  • Juan Carlos Echeverry

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Abstract

A price-setting mechanism based on a markup over variable costs is studied for the quite different inflationary experiences of Argentina and Colombia. The paper pursues a twofold strategy: first, it test the null hypothesis of a constant markup against the alternative of a variable one; second, it checks the sensitivity of the price setting mechanism to strong shifts in the macroeconomic environment. The model explains price setting during periods of moderate and high inflation in both countries. However, it is less powerful for the period of price stability in Argentina. Finally, markups seem to be constant for all types of inflationary experiences except hyperinflation. This stands in contrast to a body of literature that has found a negative relationship between markups and inflation for OECD countries. The estimations shed light on other interesting issues: productivity has become a crucial determinant of prices for Argentinian manufacturing firms during the period of stability and opening of the economy; in contrast, the results suggest a weak impact of the opening on Colombia firms.

Suggested Citation

  • Juan Carlos Echeverry, 1998. "Price Setting In The Argentine And Colombian Manufacturing Industry," BORRADORES DE ECONOMIA 003369, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:003369
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    1. Tommasi, Mariano, 1994. "The Consequences of Price Instability on Search Markets: Toward Understanding the Effects of Inflation," American Economic Review, American Economic Association, vol. 84(5), pages 1385-1396, December.
    2. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
    3. Mariano Tommasi, 1993. "The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 700, UCLA Department of Economics.
    4. 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 921-947, October.
    5. Kaskarelis, Ioannis A, 1993. "Inflation and the Mark-Up in UK Manufacturing Industry," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 391-407, November.
    6. Roland Bénabou & Robert Gertner, 1993. "Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 69-93.
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