Working Paper: NBER ID: w4614
Authors: Judith A. Chevalier; David S. Scharfstein
Abstract: 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.
Keywords: capital market imperfections; countercyclical markups; supermarket pricing; liquidity constraints
JEL Codes: G32; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital market imperfections (G19) | countercyclical markups (D43) |
| liquidity constraints (E41) | pricing behavior (D40) |
| economic recessions (F44) | price increases by constrained firms (L11) |
| liquidity constraints (E41) | higher markups (D49) |
| LBOs (G33) | reduced pricing flexibility (L11) |
| local chains (L14) | smaller price decreases compared to national chains (D49) |
| higher leverage (G32) | reduced pricing flexibility (L11) |