Demand, Supply, and Markup Fluctuations

92 Pages Posted: 8 Jul 2021

See all articles by Carlos Daniel Santos

Carlos Daniel Santos

New University of Lisbon - Nova School of Business and Economics

Luís F. Costa

ISEG - Lisbon School of Economics & Management of Universidade de Lisboa; REM - Research in Economics and Mathematics; UECE - Research Unit on Complexity and Economics

Paulo B. Brito

Technical University of Lisbon - School of Economics and Management and UECE

Multiple version iconThere are 3 versions of this paper

Date Written: June 22, 2021

Abstract

Markup cyclicality has been central for debating policy effectiveness and understanding business-cycle fluctuations. However, measuring the cyclicality of markups is as important as understanding the microeconomic mechanisms underlying that cyclicality. The latter requires measurement of firm-level markups and separating supply from demand shocks. We construct a novel dataset with detailed (multi-)product-level prices for individual firms. By estimating a structural model of supply and demand, we evaluate how companies adjust prices and marginal costs as a response to shocks. We find that price markups respond positively to supply shocks and negatively to demand shocks. The mechanism explaining the observed markup behaviour is the same for both shocks: incomplete pass-through of changes along the marginal-cost curve to price adjustments. These observed price and output responses are consistent with dynamic demand considerations. Finally, we use our estimated shocks to show how aggregate markup fluctuations in the sample period are mostly explained by aggregate demand shocks.

Keywords: Markups, Demand Shocks, TFP shocks

JEL Classification: C23, E32, L16, L22

Suggested Citation

Santos, Carlos Daniel and Costa, Luís Filipe Pereira da and Brito, Paulo B., Demand, Supply, and Markup Fluctuations (June 22, 2021). Available at SSRN: https://ssrn.com/abstract=3872965 or http://dx.doi.org/10.2139/ssrn.3872965

Carlos Daniel Santos (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Luís Filipe Pereira da Costa

ISEG - Lisbon School of Economics & Management of Universidade de Lisboa ( email )

Rua do Quelhas, 6
Lisboa, 1200-781
Portugal
+351 213 925 981 (Phone)
+351 213 922 808 (Fax)

HOME PAGE: http://https://www.iseg.ulisboa.pt/faculty/luis-costa/

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://https://www.iseg.ulisboa.pt/faculty/luis-costa/

UECE - Research Unit on Complexity and Economics

ISEG, U. Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://https://uece.rc.iseg.ulisboa.pt/

Paulo B. Brito

Technical University of Lisbon - School of Economics and Management and UECE ( email )

ISEG-UTL
R.Miguel Lupi, 20
Lisbon, 1249-078
Portugal

HOME PAGE: http://pascal.iseg.utl.pt/~pbrito/

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