Abstract
This paper develops an input/output model of pricing using a mark-up pricing formula. The connection between mark-up pricing and competitive pricing is analyzed through the determination of sectoral equilibrium profit mark-up rates as a function of the profit rate and the capital intensity of each sector. The model is used to analyze the effects on relative prices and the aggregate price level of exogenous changes in the nominal wage rate, tax rates, the exchange rate and world prices. Exogenous changes in the prices of domestically produced commodities are modelled via the imposition of ad valorem tax rates, which yield a measure of the net effect of the exogenous changes. Simulations are carried out under passive price adjustment as well as adjustment with price ceilings. In this last instance the model calculates the endogenously determined reduction in profit mark-ups. Lastly, empirical results of various simulations are presented using data from the Mexican economy.
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