Title: Markup Variability and Flexibility: Theory and Empirical Evidence
Abstract: Recent empirical studies have raised serious questions about the basic propositions about the cyclical behavior of prices and markups found in the traditional markup literature. The Administered Price Hypothesis and the Standard Volume Target Return Pricing (SVTRP) and Wage-Cost Markup (WCM) models, which provide its theoretical support, posit the following: (1) the markup (over average variable costs [AVC]) never declines during the expansion phase of the business cycle;' (2) in the short run or over the cycle, prices and markups are less flexible (more stable) in highly concentrated industries than in industries of low concentration; and (3) in highly concentrated industries, prices and markups are insensitive to short-run fluctuations in demand conditions and thus are solely determined by cost considerations. The first two propositions deal with, respectively, the qualitative nature of the markup trajectory over the cycle and the relative flexibility of price and markup behavior,2 This paper summarizes and empirically tests an alternative theory of markup pricing. It is concluded that, over the typical business cycle, (1) the markup rises from initial trough until the midexpansion and then declines until the terminal trough and (2) markup flexibility is positively related to the degree of (demand) competition. This cyclical pattern of markup variability is shown to exist in major industry groups for all postwar cycles up to 1980. Regression analysis reveals that in highly concentrated industries a positive relation exists between markup flexibility and the level of import competition and a proxy for the elasticity of demand. * The author is grateful to James R. Crotty, Peter T. Gottschalk, William G. Shepherd, and an anonymous referee for helpful comments on earlier versions of this paper. 1. See Weintraub (1959, chs. 4-5), Eckstein (1964, p. 280), Blair (1972, p. 477), and Weintraub (1978, ch. 3). 2. These two aspects of markup behavior will be referred to throughout this paper. The markup trajectory refers to its dynamic time path over the business cycle. Its qualitative nature is summarized by its first and second time deriv-
Publication Year: 1986
Publication Date: 1986-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 19
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