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The Cyclicality of Gross Margins

Sergio Rebelo (), Arlene Wong () and Eric Anderson
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Eric Anderson: Northwestern University

No 899, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: How does the margin of price over costs vary across firms and products? How does the price margin vary over the business cycle? Do firms adjust their mark-ups or other dimensions of production in response to different types of aggregate shocks? Answering these questions is crucial for distinguishing between different macro models of firm dynamics, and for understanding the nature of business cycles and employment dynamics. In this paper, we provide direct evidence on the cross-sectional distribution and cyclicality of price margins, rather than relying on parametric assumptions on production functions and demand systems. We use a unique data source of prices and marginal costs from a large U.S. retailer, as well as firm-level data on gross margins and profits for large firms in the retail sector. We describe a simple geography model in the spirit of Melitz (2003) that is consistent with our empirical findings. We discuss the implications of these models for spatial variation, employment and regional inequality following aggregate economic shocks.

Date: 2017
New Economics Papers: this item is included in nep-bec, nep-mac and nep-ure
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