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A Risk Map of Markups: Why We Observe Mixed Behaviors of Markups

Author

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  • Kim , Seong-Hoon

    (Korea Economic Research Institute)

  • Moon , Seongman

    (Chonbuk National University)

Abstract

This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels of risk internalization that arise when firms face uninsurable business risks. One channel is based on passive risk consideration, through which firms raise prices to abide by riskier business thereby associating higher production with higher prices. The other channel is based on active risk management, through which firms lower prices to handle riskier business thereby associating higher production with lower prices. The relative responsiveness of the two channels to a shock depends on each fir's fundamental characteristics and leads to a sharp division of markup cyclicality across sectors.

Suggested Citation

  • Kim , Seong-Hoon & Moon , Seongman, 2014. "A Risk Map of Markups: Why We Observe Mixed Behaviors of Markups," Staff Papers 14-5, Korea Institute for International Economic Policy.
    • Handle: RePEc:ris:kiepsp:2014_005
    DOI: 10.2139/ssrn.2495193
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    Citations

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    Cited by:

    1. Chrysovalantis Amountzias, 2021. "Markup cyclicality, competition and liquidity constraints: Evidence from a panel VAR analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3696-3718, July.
    2. Wenxin Wang & Yaowen Liang & Zhuo Ru & Haojie Guo & Bingjie Zhao, 2023. "World Forage Import Market: Competitive Structure and Market Forces," Agriculture, MDPI, vol. 13(9), pages 1-18, August.

    More about this item

    Keywords

    Markups; Risk Internalization; Technology; Market Power; Cost Channel; Hedging Channel;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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