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Empirical Economics

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01.09.2006 | Original Paper

Further results on monopolistic competition, markup pricing and the business cycle in Switzerland

verfasst von: Christian Müller

Erschienen in: Empirical Economics | Ausgabe 3/2006

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Abstract

This paper investigates how firms’ market power affects the price level. Based on a small macro-model it is shown empirically that firms have structural markup pricing power and take advantage of favourable business cycle fluctuations. To this aim, a multivariate time series model with double integrated variables is estimated. Thereby a model-based business cycle indicator can be derived. Its information content is confronted with survey data giving rise to what is going to be called semantic cross validation approach.

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The nonlinearity is also preserved in the log-linear econometric version of the model.

Refer to Table 4 in the Appendix for details of the test statistics.

This result is relatively robust with respect to the variation of p. For 3≤p≤6 the largest eigenvalue is always larger than 0.95, the second and third largest are above 0.9, and the fourth does not exceed 0.78. At p=7 the four largest eigenvalues are 0.9266, 0.9266, 0.88, 0.88.

An anonymous referee has pointed out that \(\widehat{\delta }_{1} \) implies an annual productivity growth rate of 1.25% which approximately matches the observed sample period’s average annual productivity growth rate.

The estimation is performed with Cats in Rats.

Summary statistics for residual properties are provided in Table 3.

I am indebted to an anonymous referee for valuable advise on the issue.

Analytically, it does not matter whether we use \( \ifmmode\expandafter\hat\else\expandafter\^\fi{\varepsilon }_{t} \) or \( \ifmmode\expandafter\hat\else\expandafter\^\fi{\varepsilon }^{*}_{t} \) although \( \ifmmode\expandafter\hat\else\expandafter\^\fi{\varepsilon }_{t} \) is easier to interpret economically. The following computations are nevertheless based on \( \ifmmode\expandafter\hat\else\expandafter\^\fi{\varepsilon }^{*}_{t} \) because it meant less programming effort.

The computation is performed with Cats in Rats.

Technically, the model is estimated by full information maximum likelihood with identity equations added for π _t, \( \ifmmode\expandafter\hat\else\expandafter\^\fi{\varepsilon }^{*}_{t} \), \( \pi ^{*}_{t} \), Δp _t, p _t, Δw _t and w _t and then a once-off shock is given to the equation for \( \pi ^{*}_{t} \) or \( \ifmmode\expandafter\hat\else\expandafter\^\fi{\varepsilon }^{*}_{t} \), respectively.

This assumption could also be dropped which would only mean a couple of more lines, yet not change the main implications.

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Titel: Further results on monopolistic competition, markup pricing and the business cycle in Switzerland
verfasst von: Christian Müller
Publikationsdatum: 01.09.2006
Verlag: Physica-Verlag
Erschienen in: Empirical Economics / Ausgabe 3/2006
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-005-0051-4

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