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Capital Market Imperfections and Countercyclical Markups: Theory and Evidence

  • Judith A. Chevalier
  • David S. Scharfstein

During recessions, output prices tend to rise relative to wages and raw-materials prices. One explanation of this fact is that imperfectly competitive firms compete less aggressively during recessions - that is, markups of price over marginal cost are countercyclical. We present a model in which markups are countercyclical because of capital-market imperfections. During recessions, liquidity-constrained firms try to boost short-run profits by raising prices to cut their investments in market share. We provide evidence from the supermarket industry in support of this theory. We show that during regional and macroeconomic recessions, the most financially constrained supermarket chains tend to raise their prices relative to less financially constrained chains.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4614.

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Date of creation: Jan 1994
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Publication status: published as American Economic Review, Vol.86, No.4, September,1996.
Handle: RePEc:nbr:nberwo:4614
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