Endogenous firm competition and the cyclicality of markups

Hassan Afrouzi

No 265, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: The cyclicality of markups is crucial to understanding the propagation of shocks and the size of multipliers. I show that the degree of inertia in the response of output to shocks can reverse the cyclicality of markups within implicit collusion and customer-base models. In both classes of models, markups follow a forward looking law of motion in which they depend on firms' conditional expectations over stochastic discount rates and changes in output, implying that auxiliary assumptions that affect the inertia of output can potentially reverse cyclicality of markups in each of these models. I test this common law of motion with data for firms' expectations from New Zealand and find that firms' markup setting behavior is more consistent with implicit collusion models than customer base models. Calibrating an implicit collusion model to the U.S. data, I find that markups are procyclical if there is inertia in the response of output to shocks, as commonly found in the data.

JEL-codes: D21 E3 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2016-02-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-dge and nep-mac
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Related works:
Journal Article: Endogenous Firm Competition and the Cyclicality of Markups (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:265

DOI: 10.24149/gwp265

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