Abstract
AbstractThe main scope of this study is to investigate the effects of competition and liquidity constraints on the cyclical behaviour of the markup ratio. In particular, 79 2‐digit NACE Rev.2 sectors across the UK manufacturing and services industry over 2008–2017 are taken into account in order to observe markup cyclicality and whether pricing decisions are significantly influenced by the degree of competition and liquidity restrictions. A panel VAR framework is used to take into account the presence of cross‐section dependence and heterogeneity amongst the regressors of the model. The empirical results provide the following significant insights: (a) the markup ratio across the UK sectors follows a countercyclical pattern, (b) concentrated sectors tend to charge countercyclical price–cost margins as they attempt to increase their market share in normal periods and (c) sectors with liquidity constrained firms charge countercyclical markups in order to substitute lack of funding with additional revenue. Complementary findings also suggest that more profitable firms charge procyclical markup ratios, thus validating predatory pricing strategies in more concentrated sectors.
Highlights
Firms across industries tend to form their pricing strategies according to expected consumer demand and various supply factors contributing in the production process
The estimation of a panel Vector Error Correction model provides evidence of the price–cost margin charged by the 79 2-digit NACE Rev.2 sectors over 2008–2017
The manufacturing industry charges a higher price–cost margin than the services industry; the highest markup ratios are charged by services sectors
Summary
Firms across industries tend to form their pricing strategies according to expected consumer demand and various supply factors contributing in the production process. There is sufficient empirical evidence that two of the most important supply factors influencing pricing decisions are the degree of competition within sectors and the degree of firm accessibility to liquidity (Badinger, 2007; Bellone, Musso, Nesta, & Warzynski, 2016; Bernanke, Gertler, & Gilchrist, 1996; Braun & Larrain, 2005). Firms can use their market power to increase their revenue either through higher selling prices, when demand is inelastic, or through lower prices when demand is quite elastic. Any barriers restricting access to liquidity may force firms to reduce investment on labour and capital equipment, leading to reduced production (Braun & Raddatz, 2016; Raddatz, 2006)
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