Capital Market Imperfections and Countercyclical Markups: Theory and Evidence

47 Pages Posted: 22 Jul 2000 Last revised: 16 Aug 2010

See all articles by Judith A. Chevalier

Judith A. Chevalier

Yale School of Management; National Bureau of Economic Research (NBER)

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Date Written: January 1994

Abstract

During recessions, output prices tend to rise relative to wages and raw-materials prices. One explanation of this fact is that imperfectly competitive firms compete less aggressively during recessions - that is, markups of price over marginal cost are countercyclical. We present a model in which markups are countercyclical because of capital-market imperfections. During recessions, liquidity-constrained firms try to boost short-run profits by raising prices to cut their investments in market share. We provide evidence from the supermarket industry in support of this theory. We show that during regional and macroeconomic recessions, the most financially constrained supermarket chains tend to raise their prices relative to less financially constrained chains.

Suggested Citation

Chevalier, Judith A. and Scharfstein, David S., Capital Market Imperfections and Countercyclical Markups: Theory and Evidence (January 1994). NBER Working Paper No. w4614. Available at SSRN: https://ssrn.com/abstract=233695

Judith A. Chevalier (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David S. Scharfstein

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-496-5067 (Phone)
617-496-8443 (Fax)

HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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