The Cyclicality of Markups in a Model with Adjustment Costs: Econometric Evidence for US Industry

Abstract

In this paper we investigate the impact of demand fluctuations on market power in US manufacturing industries. We impose on a model with adjustment costs the minimum structure necessary to recover a measure of markups. Markups are allowed to vary with both the state and future evolution of demand and estimates of price‐cost margins are obtained from the Euler equation for capital. We conduct the empirical investigation for US two‐digit manufacturing industries using annual data covering the 1952–1985 period. We find that markups are inversely related to current demand. However, given the state of demand, they vary directly with expectations of future demand changes.

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