NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Cyclical Markups: Theories and Evidence

Julio J. Rotemberg, Michael Woodford

NBER Working Paper No. 3534
Issued in December 1990
NBER Program(s):   EFG

If changes in aggregate demand were an important source of macroeconomic fluctuations, real wages would be countercyclical unless markups of price over marginal cost were themselves countercyclical. We thus examine three theories of markup variation at cyclical frequencies. The first assumes only that the elasticity of demand is a function of the level of output. In the second, firma face a tradeoff between exploiting their existing customers and attracting new customers. Markups then depend also on rates of return and future sales expectations; a high rate of return or expectations of low sales growth lead firms to assign a lower value to future revenues from new customers. Firma thus raise prices and markups. In the third theory, markups are chosen to ensure that no one deviates from an (implicitly) collusive understanding. Increases in rates of return or pessimistic expectations then lead firms to be less concerned with future punishments so that markups fall. Aggregate post-war data from the U.S. are moat consistent with the predictions of the implicit collusion model.

download in pdf format
   (712 K)

email paper

This paper is available as PDF (712 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3534

Published: Blanchard, O.J. and S. Fischer (eds.) NBER Macroeconomics Annual 1991. Cambridge: MIT Press, 1991.

Users who downloaded this paper also downloaded these:
Rotemberg and Woodford w6909 The Cyclical Behavior of Prices and Costs
Rotemberg and Woodford Markups and the Business Cycle
Rotemberg and Woodford w4502 Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets
Edmond and Veldkamp w14452 Income Dispersion and Counter-Cyclical Markups
Feenstra and Weinstein w15749 Globalization, Markups and U.S. Welfare
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us