Do Markup Dynamics Reflect Fundamentals or Changes in Conduct?
Bank for International Settlements (BIS) - Monetary and Economic Department; Hanken School of Economics - Department of Economics; University of Helsinki - Department of Political and Economic Studies
University of Haifa - Department of Economics
Swedish School of Economics and Business Administration
April 24, 2009
Bank of Finland Research Discussion Paper No. 12/2009
Persistent shifts in equilibria are likely to arise in oligopolistic markets and may be detrimental to the measurement of conduct, related markups and intensity of competition. We develop a cointegrated VAR (vector autoregression) based approach to detect long-run changes in conduct when data are difference stationary. Importantly, we separate the components in markups which are exclusively related to long-run changes in conduct from those explained solely by fundamentals. Our approach does not require estimation of markups and conduct directly, thereby avoiding complex problems in existing methodologies related to multiple and changing equilibria. Results from applying the model to US and five major European banking sectors indicate substantially different behavior of conventional raw markups and conduct-induced markups.
Number of Pages in PDF File: 48
Keywords: markups, cointegration, VAR, macroeconomic fundamentals, competition, banking
JEL Classification: C32, C51, G20, L13, L16
Date posted: July 4, 2009