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Endogenous Markups, Intensity of Competition, and Persistence of Business Cycles
Author(s) -
Zhang Junxi
Publication year - 2007
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2007.tb00852.x
Subject(s) - cournot competition , imperfect competition , economics , business cycle , competition (biology) , oligopoly , microeconomics , persistence (discontinuity) , imperfect , endogenous growth theory , returns to scale , mechanism (biology) , bertrand competition , econometrics , production (economics) , macroeconomics , human capital , market economy , ecology , linguistics , philosophy , geotechnical engineering , epistemology , engineering , biology
In order to study the propagation mechanism of business cycles, in particular to investigate how the intensity of competition affects market structure and output persistence over business cycles, this paper presents a real business‐cycle model with imperfect competition and increasing returns to scale. This analysis considers the markups of price over cost to be endogenous. With endogenous markups, two standard forms of oligopolistic competition—Bertrand and Cournot—are considered. Results show that: (1) the propagation mechanism in the sense of output persistence is greater under Cournot; (2) the propagation mechanism is unequivocally greater with imperfect competition, regardless of whether markups are endogenous or not; and (3) under imperfect competition, the propagation mechanism is greater with endogenous markups than with exogenous markups. Overall, these results suggest that more intense competition produces lower persistence in output growth and, thus, a weaker propagation mechanism. In a calibration exercise, these differences were also found to be quantitatively important.