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Cyclical Pricing of Durable Goods

I examine price markups in monopolisticly-competitive markets that experience fluctuations in demand because the economy experiences cyclical fluctuations in productivity. Markups depend positively on the average income of purchasers in the market. For a nondurable good average income of purchasers is procyclical; so the markup is procyclical. For a durable good. however. the average income of purchasers is likely to decrease in booms because low income consumers of the good concentrate their purchases in boom periods; so the markup is likely countercyclical. This is particularly true for growing markets. I find markups make the aggregate economy fluctuate more in response to productivity if goods are sufficiently durable.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3050.

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Date of creation: Jul 1989
Date of revision:
Handle: RePEc:nbr:nberwo:3050
Note: EFG
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  1. Laurence M. Ball & David Romer, 1987. "Are Prices Too Sticky?," NBER Working Papers 2171, National Bureau of Economic Research, Inc.
  2. John Roberts & Hugo Sonnenschein, 1976. "On the Foundations of the Theory of Monopolistic Competition," Discussion Papers 169, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Geary, Patrick T & Kennan, John, 1982. "The Employment-Real Wage Relationship: An International Study," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 854-71, August.
  4. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  5. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  6. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November.
  7. Stiglitz, Joseph E, 1984. "Price Rigidities and Market Structure," American Economic Review, American Economic Association, vol. 74(2), pages 350-55, May.
  8. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  9. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  10. Jones, Larry E., 1983. "Existence of equilibria with infinitely many consumers and infinitely many commodities : A theorem based on models of commodity differentiation," Journal of Mathematical Economics, Elsevier, vol. 12(2), pages 119-138, October.
  11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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