Endogenous Firm Competition and the Cyclicality of Markups

40 Pages Posted: 11 Feb 2016

Date Written: 2016-02-01

Abstract

The cyclicality of markups is crucial to understanding the propagation of shocks and the size of multipliers. I show that the degree of inertia in the response of output to shocks can reverse the cyclicality of markups within implicit collusion and customer-base models. In both classes of models, markups follow a forward looking law of motion in which they depend on firms' conditional expectations over stochastic discount rates and changes in output, implying that auxiliary assumptions that affect the inertia of output can potentially reverse cyclicality of markups in each of these models. I test this common law of motion with data for firms' expectations from New Zealand and find that firms' markup setting behavior is more consistent with implicit collusion models than customer base models. Calibrating an implicit collusion model to the U.S. data, I find that markups are procyclical if there is inertia in the response of output to shocks, as commonly found in the data.

JEL Classification: D21, D92, E3

Suggested Citation

Afrouzi, Hassan, Endogenous Firm Competition and the Cyclicality of Markups (2016-02-01). Globalization and Monetary Policy Institute Working Paper No. 265, Available at SSRN: https://ssrn.com/abstract=2731090 or http://dx.doi.org/10.24149/gwp265

Hassan Afrouzi (Contact Author)

Columbia University ( email )

420 W. 118th Street
New York, NY 10027
United States

HOME PAGE: http://www.afrouzi.com

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