The Variation of Markups Over the Business Cycle

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This project studies models where variations in the markup of price over marginal cost is a central component of the explanation of business cycles. The theoretical rigor and the empirical validity of imperfect competition models of business cycles will be determined. This research should provide valuable insights into the relationship between macroeconomic activity and microeconomic industry structure. More specifically, time series for markup variation will be constructed for both the private sector as a whole and for 4- digit manufacturing industries. Various procedures are proposed to check the plausibility of the theoretical models. For instance, if markup variations as a result of imperfect competition explain business cycles, such markup variation should be more pronounced in relatively concentrated sectors. In addition, different models of markup variation have different implications for how the current level of sales and the expected future level of profits affect markups. Both aggregate and disaggregated data contain information about the way these variables affect markups. The extent to which aggregate demand influences output through the variables that determine markups in the models (current sales and the present value of future profitability) will also be ascertained. Finally, the output volatility that changes in these variables induce through changes in the markup will be measured.