Mark-ups and Market-Share Uncertainty: Theory and Evidence
The Phelps and Winter (1970) customer-market model predicts that firms will charge lower than the static monopoly mark-up because monopolistic pricing policy is moderated by the potential effect of high prices on the market-share. This paper extends Phelps and Winter (1970) to incorporate stochastic market- share evolution and shows that mark-ups could potentially exceed static monopoly mark-ups therefore reversing the original Phelps and Winter (1970) result. We also present valuable empirical evidence on British industries and show that market-share uncertainty and mark-ups are positively correlated. This can potentially explain the pension puzzle of 1988 where one observed both high mark-ups and high profitability. The paper also empirically shows that financial market indcies proxing for customer-value are linked with price mark-ups.
|Date of creation:||29 Aug 2002|
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