Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-24T01:48:48.887Z Has data issue: false hasContentIssue false
  • English
  • Français

THE PRICE–MARGINAL COST MARKUP AND ITS DETERMINANTS IN U.S. MANUFACTURING

Published online by Cambridge University Press:  03 January 2013

Sandeep Mazumder
Sandeep Mazumder*
Affiliation:
Wake Forest University
*
Address correspondence to: Sandeep Mazumder, Department of Economics, Carswell Hall, Box 7505, Wake Forest University, Winston-Salem, NC 27109, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper estimates the price–marginal cost markup for U.S. manufacturing using a new methodology. Most existing techniques of estimating the markup are a variant on the Hall (1988) framework that involves manipulating the Solow Residual. However, this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate. By relaxing this assumption we are able to derive a generalized markup index, which, when estimated using manufacturing data, is highly countercyclical and decreasing in trend since the 1960s. When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry. Thus, increasing foreign competition in manufacturing has led to a decline in the industry's markup over time.

Keywords

MarkupMarginal Cost
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 4 , June 2014 , pp. 783 - 811
Copyright
Copyright © Cambridge University Press 2012 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Barkume, A. (2007) Some New Evidence on Overtime Use, Total Job Compensation, and Wage Rates. Working paper 402, Bureau of Labor Statistics.Google Scholar
Bils, M. (1987) The cyclical behavior of marginal cost and price. American Economic Review 77, 838–855.Google Scholar
Bresnahan, T. (1989) Empirical studies of industries with market power. In Schmalensee, R. and Willig, R. (eds.), Handbook of Industrial Organization, pp. 1011–1057. Amsterdam: Elsevier.Google Scholar
Domowitz, I., Hubbard, R., and Petersen, B. (1988) Market structure and cyclical fluctuations in U.S. manufacturing. Review of Economics and Statistics 70, 55–66.CrossRefGoogle Scholar
Eden, B. and Griliches, Z. (1993) Productivity, market power, and capacity utilization when spot markets are complete. American Economic Review 83, 219–223.Google Scholar
Galeotti, M. and Schiantarelli, F. (1991) Variable Markups in a Model with Adjustment Costs: Econometric Evidence for U.S. Industry. Working paper 91–44, C.V. Starr Center for Applied Economics, New York University.Google Scholar
Hall, R. (1986) Market structure and macro fluctuations. Brookings Papers on Economic Activity 2, 285–322.CrossRefGoogle Scholar
Hall, R. (1988) The relation between price and marginal cost in U.S. industry. Journal of Political Economy 96, 921–947.Google Scholar
Hall, R. (1990) Invariance properties of Solow's productivity residual. In Diamond, P. (ed.), Growth, Productivity, Employment, pp. 71–112. Cambridge, MA: MIT Press.Google Scholar
Hodrick, R. and Prescott, E. (1997) Postwar U.S. business cycles: An empirical investigation. Journal of Money, Credit and Banking 29, 1–16.Google Scholar
Hylleberg, S. and Joergensen, R. (1998) A Note on the Estimation of Markup Pricing in Manufacturing. Economics working paper 6, School of Economics and Management, University of Aarhus.Google Scholar
Lettau, M. and Ludvigson, S. (2001) Consumption, aggregate wealth, and expected stock returns. Journal of Finance 56, 815–849.CrossRefGoogle Scholar
Lewis, H. (1969) Employer interests in employee hours of work. Cuadernos de Economia 18, 38–54.Google Scholar
Marchetti, D. (2002) Markup and the business cycle: Evidence from Italian manufacturing branches. Open Economies Review 13, 87–103.CrossRefGoogle Scholar
Mazumder, S. (2010) The new Keynesian Phillips curve and the cyclicality of marginal cost. Journal of Macroeconomics 32, 747–765.Google Scholar
Morrison, C. (1992) Markups in U.S. and Japanese manufacturing: A short-run econometric analysis. Journal of Business and Economic Statistics 10, 51–63.Google Scholar
Nekarda, C. and Ramey, V. (2010) The Cyclical Behavior of the Price–Cost Markup. Working paper, University of California, San Diego, Department of Economics.Google Scholar
Oi, W. (1962) Labor as a quasi-fixed factor. Journal of Political Economy 70, 538–555.CrossRefGoogle Scholar
Roeger, W. (1995) Can imperfect competition explain the difference between primal and dual productivity measures? Estimates for U.S. manufacturing. Journal of Political Economy 103, 316–330.CrossRefGoogle Scholar
Rotemberg, J. and Woodford, M. (1990) Cyclical Markups: Theories and Evidence. NBER Working paper 3534.CrossRefGoogle Scholar
Rotemberg, J. and Woodford, M. (1999) The cyclical behavior of prices and costs. In Taylor, J. and Woodford, M. (eds.), The Handbook of Macroeconomics, vol. 1, pp. 1051–1135, Amsterdam: North-Holland.CrossRefGoogle Scholar
Sembenelli, A. and Siotis, G. (2005) Foreign Direct Investment, Competitive Pressure and Spillovers. An Empirical Analysis of Spanish Firm Level Data. CEPR discussion paper 4903.Google Scholar
Shapiro, M. (1987) Measuring Market Power in U.S. Industry. Cowles Foundation discussion paper 828.Google Scholar
Stock, J. (1987) Asymptotic properties of least squares estimators of cointegrating vectors. Econometrica 55, 1035–1056.CrossRefGoogle Scholar
Stock, J. and Watson, M. (1993) A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica 61, 783–820.CrossRefGoogle Scholar