Review of Industrial Organization 19: 99–108, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Pricing over the Cycle
HARRY BLOCH and MICHAEL OLIVE
Department of Economics, Curtin University of Technology, GPO Box U 1987, Perth 6845,
Abstract. In recent studies, the cyclical behavior of markups is examined, but the role of costs
in determining markups is ignored. Here, a pricing equation is estimated that implicitly measures
the rate of change in markup as a function of aggregate demand growth, aggregate inﬂation and
industry cost inﬂation. Results for 21 two-digit SIC industries in the U.S. over 1948 to 1979 show
incomplete pass-through from cost into price, implying a negative relationship between cost and the
markup. Aggregate inﬂation positively inﬂuences prices and markups. Aggregate demand negatively
inﬂuences prices and markups in highly concentrated industries, but not otherwise.
Key words: Business cycle, price-cost markups, pricing.
Pricing behavior over the business cycle has attracted considerable attention from
both industrial economists and macro economists. In recent years the focus has
been largely on the behavior of a particular component of price, namely the markup
of price over cost.
One of the difﬁculties with determining a ﬁrm’s markup is the inability to meas-
ure marginal cost (see Bresnahan, 1989). By relegating the markup to a parameter
that can be estimated, Hall (1988) circumvents this problem. Using an instrumental
variables method he ﬁnds that markups across two-digit U.S. industries are con-
siderable, indicating widespread market power. Roeger (1995) avoids the use of
instrumental variables in his estimation of industry markups by combining Hall’s
equation with a dual measure of cost diminution.
In the literature following Hall, variable markups are typically represented as
a function of cyclical and cross-sectional variables but not a function of marginal
cost or aggregate inﬂation. The empirical results related to the cycle are mixed.
Domowitz et al. (1988) in the U.S., Haskel et al. (1995) in the U.K. and Beccarello
An earlier version of this paper was presented to Econometric Society Australasian Meetings
in Sydney, July 1999. Helpful comments from the audience are greatly appreciated. We are also
indebted to a referee and the editor for their helpful comments on the earlier version. Any remaining
errors are the responsibility of the authors alone.