Output price determination and the business cycle

Macroeconomic models based on principles of optimisation and imperfect competition can generate substantial output effects from demand shocks if the markup on marginal cost is counter-cyclical. The determination of marginal cost and the markup in aggregate UK data are examined in this paper. It is shown that the competitive environment provided by overseas for domestic firms as well as the structure of domestic demand are important. The relationship between the markup and the business cycle depends on the source of shocks to the economy. (C) 2000 Elsevier Science B.V. All rights reserved.