Market Power and Price Movements Over the Business Cycle

30 Pages Posted: 27 Jun 2005

See all articles by Bart J. Wilson

Bart J. Wilson

Chapman University - Smith Institute for Political Economy and Philosophy; Chapman University - Economic Science Institute (ESI); Chapman University, The Dale E. Fowler School of Law

Stanley S. Reynolds

University of Arizona - Department of Economics

Abstract

This paper develops and tests implications of an oligopoly-pricing model. The model predicts that during a demand expansion, the short run competitive price is a pure strategy Nash equilibrium but in a recession, firms set prices above the competitive price. Thus, price markups over the competitive price are countercyclical. Prices set during a recession are more variable than prices set in expansions because firms employ mixed strategy pricing in recessions. The empirical analysis utilizes Hamilton's time series switching regime filter to test the predictions of the model. Fourteen out of fifteen industries have fluctuations consistent with this oligopoly-pricing model.

Suggested Citation

Wilson, Bart J. and Reynolds, Stanley S., Market Power and Price Movements Over the Business Cycle. Journal of Industrial Economics, Vol. 53, No. 2, pp. 145-174, June 2005. Available at SSRN: https://ssrn.com/abstract=739385

Bart J. Wilson (Contact Author)

Chapman University - Smith Institute for Political Economy and Philosophy ( email )

One University Drive
Orange, CA 92866
United States
(714) 628-7306 (Phone)

HOME PAGE: http://www1.chapman.edu/~bjwilson/

Chapman University - Economic Science Institute (ESI) ( email )

One University Drive
Orange, CA 92866
United States
(714) 628-7306 (Phone)

Chapman University, The Dale E. Fowler School of Law ( email )

One University Drive
Orange, CA 92866-1099
United States
(714) 628-7306 (Phone)

HOME PAGE: http://www1.chapman.edu/~bjwilson/

Stanley S. Reynolds

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

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