Liquidity constraints, competition, and markup cyclicality

Available from: 
October 2013
Paper author(s): 
Claudio Raddatz (Banco Central de Chile)
Microeconomics - Competition - Productivity

This paper provides evidence on the relation between financial constraints, competition and the cyclicality of markups. Based on long series of industry data from a large number of countries, we find that markups are more procyclical in environments with higher short-term financial constraints (liquidity constraints) and more competition. This is consistent with the “long-purse” view of predation, where unconstrained firms in industries where liquidity is an issue for the average firm, find it profitable to reduce prices (or raise them less) during recessions as predation benefits increase.


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Research section: 
Lacea 2013 annual meeting
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