Markups and the Business Cycle: Evidence from Italian Manufacturing Branches

This paper investigates the markup of price over marginal cost in Italian manufacturing branches. The approach used is an extension of Hall's model that addresses some measurement shortcomings and theoretical limitations that may affect this class of model. The hypothesis of perfect competition is rejected in the majority of sectors over the period 1977–1995. The cyclical behavior of markups is found to vary significantly across branches, thereby helping to explain the contradictory evidence regarding the whole manufacturing sector reported in the literature. At branch level, industry concentration is found to be associated with countercyclical markups, providing scope for real effects of aggregate demand shocks. Finally, the size of the markup is negatively affected by both domestic and foreign competitive pressure.