A Map of Markups: Why We Observe Mixed Behaviors of Markups

This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels through which firms handle uninsurable business losses. One channel is based on cost‐compensating motive, by which firms raise prices to reflect higher losses s...

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Bibliographic Details
Published in:Journal of economics & management strategy 2017-06, Vol.26 (2), p.529-553
Main Authors: Kim, Seong‐Hoon, Moon, Seongman
Format: Article
Language:English
Subjects:
Companies
Losses
Markups
Prices
Pricing policies
Responsiveness
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Summary:This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels through which firms handle uninsurable business losses. One channel is based on cost‐compensating motive, by which firms raise prices to reflect higher losses stochastically associated with higher output levels. The other channel is based on loss‐balancing motive, by which firms lower prices to countervail higher losses stochastically associated with higher output levels. The relative responsiveness of the two channels to a shock depends on each firm's fundamental characteristics and leads to a sharp division of markup cyclicality across sectors.
ISSN:1058-6407
1530-9134
DOI:10.1111/jems.12193