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.
Review of Industrial Organization – Springer Journals
Published: Oct 3, 2004
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