Abstract
In a series of recent papers, Domowitz, Hubbard and Peterson (DHP) have explored the temporal behavior of price-cost margins in a panel of 284 four-digit SIC industries. This paper reexamines DHP's apparent finding of more procyclical margins in concentrated industries, concluding that it is not robust. The result appears to arise from long-run trend correlations between margin and demand levels, rather than from short-run cyclical effects. Consistent with DHP, prices are found to be stickier and unit costs more countercyclical in concentrated industries. However, (1) an omitted variables bias is uncovered which substantially reduces the estimated cyclical effect on costs, and (2) prices are found to be more flexible in low concentration, low-PCM industries than DHP estimate. With prices more responsive to growth in demand and a countercyclical effect on cost of substantially lower magnitude, margins are thus estimated to bemore procyclical in less concentrated industries. This finding explains the relative rise in low concentration margins in the sixties which, in turn, helps account for the declining significance of the cross-sectional concentration-margins relationship.
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I would like to acknowledge helpful comments from Roy Rotheim, and two anonymous reviewers.
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Goodstein, E.B. Are margins more procyclical in concentrated industries?. Rev Ind Organ 9, 773–789 (1994). https://doi.org/10.1007/BF01026584
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DOI: https://doi.org/10.1007/BF01026584