Markups as a Hedge for Input Price Uncertainty: Evidence from Sweden

Sneha Agrawal (), Abhishek Gaurav () and Melinda Suveg
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Sneha Agrawal: International Monetary Fund
Abhishek Gaurav: Princeton University

No 1418, Working Paper Series from Research Institute of Industrial Economics

Abstract: In this paper, we study a new channel to explain firms’ price-setting behavior. We propose that uncertainty about factor prices has a positive effect on markups. We show theoretically that firms with higher shares of inputs with volatile prices set higher markups. We use the Bartik shift-share approach to empirically test whether firms that use more oil relative to other inputs set higher markups when oil prices are more volatile. Our estimates imply that a one standard deviation increase in oil price volatility leads to a 0.38 percent increase in the markup of firms with average oil exposure.

Keywords: Price setting; Markups; Input price volatility; Precautionary pricing (search for similar items in EconPapers)
JEL-codes: D21 D22 D24 D42 D80 E31 E32 L11 L60 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2021-11-16
New Economics Papers: this item is included in nep-com, nep-ene, nep-eur and nep-mac
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