NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Market Imperfections and Countercyclical Markups: Theory and Evidence

Judith A. Chevalier, David S. Scharfstein

NBER Working Paper No. 4614
Issued in January 1994
NBER Program(s):   IO

During recessions, output prices tend to rise relative to wages and raw-materials prices. One explanation of this fact is that imperfectly competitive firms compete less aggressively during recessions - that is, markups of price over marginal cost are countercyclical. We present a model in which markups are countercyclical because of capital-market imperfections. During recessions, liquidity-constrained firms try to boost short-run profits by raising prices to cut their investments in market share. We provide evidence from the supermarket industry in support of this theory. We show that during regional and macroeconomic recessions, the most financially constrained supermarket chains tend to raise their prices relative to less financially constrained chains.

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Document Object Identifier (DOI): 10.3386/w4614

Published: American Economic Review, Vol.86, No.4, September,1996.

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