Imperfect Competition and the Dynamics of Mark-Ups

Bank of England Working Paper No. 110

69 Pages Posted: 18 Jul 2000

See all articles by Erik Britton

Erik Britton

affiliation not provided to SSRN

Jens D.J. Larsen

Royal Bank of Canada Capital Markets (London)

Ian Small

Lexecon Ltd.

Date Written: 2000

Abstract

This paper investigates the behaviour of the mark-up of prices over marginal costs under two different assumptions about market structure. In the customer market model firms lower their mark-up when current output is low relative to future profits, foregoing current profits in order to capture future market share. In markets characterised by implicit collusion, firms lower their mark-ups when current output is high relative to future profits in order to lower the incentives to undercut the implicit cartel. Only the customer market model generates predictions consistent with UK evidence, but this in inconsistent with evidence from the United States. It may be necessary to use more than one model to explain all the facts.

JEL Classification: E39, L11

Suggested Citation

Britton, Erik and Larsen, Jens D.J. and Small, Ian, Imperfect Competition and the Dynamics of Mark-Ups (2000). Bank of England Working Paper No. 110. Available at SSRN: https://ssrn.com/abstract=228875 or http://dx.doi.org/10.2139/ssrn.228875

Erik Britton (Contact Author)

affiliation not provided to SSRN

Jens D.J. Larsen

Royal Bank of Canada Capital Markets (London) ( email )

Thames Court
One Queenhithe
London, EC4V 4DE
United Kingdom

Ian Small

Lexecon Ltd.

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

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