IDEAS home Printed from
   My bibliography  Save this paper

Cyclical Markups: Theories and Evidence


  • Julio J. Rotemberg
  • Michael Woodford


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
    Note: EFG

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Gallant, A. Ronald & Jorgenson, Dale W., 1979. "Statistical inference for a system of simultaneous, non-linear, implicit equations in the context of instrumental variable estimation," Journal of Econometrics, Elsevier, vol. 11(2-3), pages 275-302.
    2. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    3. Robert B. Barsky & Gary Solon, 1989. "Real Wages Over The Business Cycle," NBER Working Papers 2888, National Bureau of Economic Research, Inc.
    4. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    5. Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 115-136.
    6. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 55-66, February.
    7. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 77-114.
    8. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    9. Gottfries, Nils, 1986. " Price Dynamics of Exporting and Import-Competing Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(2), pages 417-436.
    10. Parsons, Donald O, 1973. "Quit Rates Over Time: A Search and Information Approach," American Economic Review, American Economic Association, vol. 63(3), pages 390-401, June.
    11. Abreu, Dilip, 1986. "Extremal equilibria of oligopolistic supergames," Journal of Economic Theory, Elsevier, vol. 39(1), pages 191-225, June.
    12. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Jahangir Aziz & Luc Leruth, 1999. "Cyclical Effects of the Composition of Government Purchases," Macroeconomics 9902007, EconWPA.
    2. Fabio Ghironi, 2000. "Towards new open economy macroeconometrics," Staff Reports 100, Federal Reserve Bank of New York.
    3. Juan José Echavarría & Enrique López & Sergio Ocampo & Norberto Rodríguez, 2011. "Choques, instituciones laborales y desempleo en Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 29(66), pages 128-173, December.
    4. Fabio Ghironi, 2000. "U.S.-Europe Economic Interdependence and Policy Transmission," Boston College Working Papers in Economics 470, Boston College Department of Economics.
    5. 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.
    6. Russell Cooper & Andrew John, 2000. "Imperfect competition and macroeconomics : Theory and quantitative implications," Cahiers d'Économie Politique, Programme National Persée, vol. 37(1), pages 289-328.
    7. 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.
    8. 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.
    9. AZIZ, Jahangir & LERUTH, Luc, 1999. "Cyclical effects of the composition of government purchases," CORE Discussion Papers 1999032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3534. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.