The Cyclicality of Mark-Ups and Profit Margins: Some Evidence for Manufacturing and Services

Bank of England Working Paper No. 72

33 Pages Posted: 14 Aug 1998

Date Written: December 1997

Abstract

This paper uses industry and firm data to look at price cost mark-ups and firm profit margins in U.K. manufacturing and services. In particular it examines how they behave over the business cycle. It has two main findings. First, the estimated average mark-ups and the profit margin results both suggest that there is imperfect competition in manufacturing and services. Second, mark-ups are pro-cyclical, as are profit margins even after allowing for movements in their standard determinants. This suggests that price pressures may increase during recovery periods and decrease during recessions. One possible explanation for this is Kreps and Scheinkman's argument that the pro-cyclicality of capacity constraints means that firms move between Cournot and Bertrand competition over the cycle. The finding that mark-ups are pro-cyclical also raises doubts about macroeconomic models that assume that demand shocks may affect employment via counter-cyclical mark-ups.

JEL Classification: E31, E32, L60, L80

Suggested Citation

Small, Ian, The Cyclicality of Mark-Ups and Profit Margins: Some Evidence for Manufacturing and Services (December 1997). Bank of England Working Paper No. 72. Available at SSRN: https://ssrn.com/abstract=115037 or http://dx.doi.org/10.2139/ssrn.115037

Ian Small (Contact Author)

Lexecon Ltd.

Orion House
5 Upper St Martin's Lane
London WC2H 9EA
United Kingdom

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