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

Seong-Hoon Kim and Seongman Moon

No 14-5, Staff Papers from Korea Institute for International Economic Policy

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.

Keywords: Markups; Risk Internalization; Technology; Market Power; Cost Channel; Hedging Channel (search for similar items in EconPapers)
JEL-codes: D21 E32 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-09-05
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Citations: View citations in EconPapers (2)

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