Estimation of the Cyclical Behaviour of Mark-Ups: A Technical Note

Abstract

This paper presents estimates of the cyclical fluctuations of price-cost margins, following an extended version of the Rotemberg and Woodford (1991) approach. The results support the hypothesis of counter-cyclical price margins in most manufacturing industries, especially in the presence of downward rigidities of labour inputs. This is consistent with a growing body of empirical literature showing that economic booms tend to increase competition or decrease the incentives for collusion, thereby creating downward pressures on price margins. It also offers an appealing interpretation to the otherwise puzzling pro-cyclicality of real wages.

Keywords: imperfect competition, mark-up, Solow residual, business cycle

JEL Classification: D24, D40, L60