Endogenous Firm Competition and the Cyclicality of Markups

Abstract

Abstract We show that the cyclicality of output growth is a sufficient predictor for the cyclicality of markups in models that micro-found variable markups through dynamic trade-offs. We use data on markups from the U.S. as well as survey data on firms' expectations from New Zealand to test the predictions of these models and find evidence in favor of their mechanisms. Finally, we study the implications of these mechanisms for cyclicality of markups in a calibrated general equilibrium model. In particular, we find that the degree of hump-shaped response in output is crucial for the direction of aggregate markup cyclicality.