Markup cyclicality, competition and liquidity constraints: Evidence from a panel VAR analysis

Abstract

The main scope of this study is to investigate the effects of competition and liquidity constraints on the cyclical behaviour of the markup ratio. In particular, 79 2-digit NACE Rev.2 sectors across the UK manufacturing and services industry over 2008-2017 are taken into account in order to observe markup cyclicality and whether pricing decisions are significantly influenced by the degree of competition and liquidity restrictions. A panel VAR framework is used to take into account the presence of cross-section dependence and heterogeneity amongst the constituent regressors of the model. The empirical results provide the following significant insights: (i) the markup ratio across the UK sectors follows a countercyclical pattern, (ii) concentrated sectors tend to charge countercyclical price-cost margins as they attempt to increase their market share in normal periods, and (iii) sectors with liquidity constrained firms charge countercyclical markups in order to substitute lack of funding with additional revenue. Complementary findings also suggest that more profitable firms charge procyclical markup ratios, thus validating the predatory pricing strategy in more concentrated sectors.