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Demand, supply and markup fluctuations

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  • Carlos Santos
  • Luis F. Costa
  • Paulo Brito

Abstract

The cyclical behavior of markups is at the center of macroeconomic debate on the origins of business-cycle fluctuations and policy effectiveness. In theory, markups may fluctuate endogenously with the business cycle due to sluggish price adjustment or to deeper motives affecting the price-elasticity of demand faced by individual producers. In this article we make use of a large firm- and product-level panel of Portuguese manufacturing firms in the 2004-2010 period. The biggest empirical challenge is to separate supply (TFP) from demand shocks. Our dataset allows to do so, by containing information on product-level prices at a yearly frequency. Furthermore, markups are mismeasured when calculated with the labor share. We use the share of intermediate inputs instead. Our main results suggest that markups are pro-cyclical with TFP shocks and generally counter-cyclical with demand shocks. We also show how markups become procyclical if the markup is obtained using the labour share instead of intermediate inputs. Adjustment costs create a wedge between the labour share and the actual markup which explain the observed correlations.

Suggested Citation

  • Carlos Santos & Luis F. Costa & Paulo Brito, 2016. "Demand, supply and markup fluctuations," Nova SBE Working Paper Series wp609, Universidade Nova de Lisboa, Nova School of Business and Economics.
  • Handle: RePEc:unl:unlfep:wp609
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    Cited by:

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    More about this item

    Keywords

    Markups; demand shocks; TFP shocks;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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