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MARKET POWER AND PRICE MOVEMENTS OVER THE BUSINESS CYCLE *
Author(s) -
Wilson Bart J.,
Reynolds Stanley S.
Publication year - 2005
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.0022-1821.2005.00250.x
Subject(s) - economics , recession , oligopoly , business cycle , market power , microeconomics , econometrics , variable (mathematics) , monetary economics , macroeconomics , monopoly , mathematics , mathematical analysis , cournot competition
This paper develops and tests implications of an oligopoly‐pricing model. The model predicts that during a demand expansion, the short run competitive price is a pure strategy Nash equilibrium but in a recession, firms set prices above the competitive price. Thus, price markups over the competitive price are countercyclical. Prices set during a recession are more variable than prices set in expansions because firms employ mixed strategy pricing in recessions. The empirical analysis utilizes Hamilton's time series switching regime filter to test the predictions of the model. Fourteen out of fifteen industries have fluctuations consistent with this oligopoly‐pricing model.