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Cyclical Markups: Theories and Evidence

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  • Julio J. Rotemberg
  • Michael Woodford

Abstract

If changes in aggregate demand were an important source of macroeconomic fluctuations, real wages would be countercyclical unless markups of price over marginal cost were themselves countercyclical. We thus examine three theories of markup variation at cyclical frequencies. The first assumes only that the elasticity of demand is a function of the level of output. In the second, firma face a tradeoff between exploiting their existing customers and attracting new customers. Markups then depend also on rates of return and future sales expectations; a high rate of return or expectations of low sales growth lead firms to assign a lower value to future revenues from new customers. Firma thus raise prices and markups. In the third theory, markups are chosen to ensure that no one deviates from an (implicitly) collusive understanding. Increases in rates of return or pessimistic expectations then lead firms to be less concerned with future punishments so that markups fall. Aggregate post-war data from the U.S. are moat consistent with the predictions of the implicit collusion model.

Suggested Citation

  • Julio J. Rotemberg & Michael Woodford, 1990. "Cyclical Markups: Theories and Evidence," NBER Working Papers 3534, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3534
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    3. Fabio Ghironi, 2000. "Towards New Open Economy Macroeconometrics," Boston College Working Papers in Economics 469, Boston College Department of Economics.
    4. Barr, Tavis & Roy, Udayan, 2008. "The effect of labor market monopsony on economic growth," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1446-1467, December.
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    6. Cazzavillan, Guido & Lloyd-Braga, Teresa & Pintus, Patrick A., 1998. "Multiple Steady States and Endogenous Fluctuations with Increasing Returns to Scale in Production," Journal of Economic Theory, Elsevier, vol. 80(1), pages 60-107, May.
    7. Fabio Ghironi, 2000. "Understanding Macroeconomic Interdependence: Do We Really Need to Shut Off the Current Account?," Boston College Working Papers in Economics 465, Boston College Department of Economics, revised 14 Aug 2003.
    8. AZIZ, Jahangir & LERUTH, Luc, 1999. "Cyclical effects of the composition of government purchases," LIDAM Discussion Papers CORE 1999032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Fabio Ghironi, 2000. "U.S.-Europe Economic Interdependence and Policy Transmission," Boston College Working Papers in Economics 470, Boston College Department of Economics.
    10. Alexandre Mathis & Lucrezia Reichlin, 1992. "Les effets du taux d'intérêt réel sur l'activité en France," Revue de l'OFCE, Programme National Persée, vol. 41(1), pages 195-216.
    11. Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics 466, Boston College Department of Economics, revised 30 Oct 2000.

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