Christopher Martin

Price adjustment and market structure

Abstract This paper shows how the extent of price inertia depends on the form of market competition. We first establish that the speed of price adjustment depends on the curvature of the profit function in the region around the optimum price. We then show how this depends on market structure. We prove the following results: 1. (1) the speed of price adjustment depends positively on the price elasticity of demand; 2. (2) the speed of price adjustment depends positively on the number of firms in a market; and 3. (3) the speed of price adjustment depends negatively on the degree of collusion between firms.

Capacity and Competition: Empirical Evidence on UK Panel Data

Following D. Kreps and J. Scheinkman (1983), it is common to view the difference between Cournot and Bertrand competition as depending on production capacity. Bertrand undercutting is only feasible if firms have capacity to serve the market gained. If firms are capacity constrained, the Cournot model is more appropriate. This paper tests the capacity and competition idea by looking at the relationship between profits and capacity constraints; if capacity constrained firms become more Cournot-like, it should be positive. Using survey data on capacity constraints merged into a panel industry data set for the United Kingdom, the authors find a robust positive relationship. Copyright 1994 by Blackwell Publishing Ltd.

Margins, concentration, unions and the business cycle: Theory and evidence for Britain

Abstract A number of recent studies have examined the cyclical relationship between price-cost margins, concentration and unions. U.S. data has concluded that unions reduce margins; margins vary over the cycle; and concentration, unionisation and the cycle interact in their effect on margins. However, there is almost no theory to account for these results. We propose a simple theory that assumes only that there is overhead labour present at the firm. This produces theoretical predictions that can explain these results, and discriminate between existing theories. We present results of our own using U.K. panel data, and show similar findings to the U.S.

Price Formation in an Open Economy: Theory and Evidence for the United Kingdom, 1951–1991

Price formation is an increasingly important part of modern macroeconomics. However, the empirical literature on price-setting is diverse and confused. This paper uses cointegration techniques to test theories of price-setting on U.K. aggregate data for 1951-91. The author finds: (1) domestic prices are determined by both domestic costs and world prices and (2) at the macroeconomic level, prices are related to marginal cost rather than average or normal cost. Copyright 1997 by Royal Economic Society.

Symmetric and asymmetric persistence of labor market shocks

Abstract Within the insider-outsider paradigm, this paper examines persistence of shocks in the labor market. We distinguish “symmetric persistence” where the extent of persistence is independent of the initial direction of the shock, and “asymmetric persistence” where beneficial and adverse shocks of equal magnitude have effects of different size. The paper offers a theoretical rationale for how the symmetry or asymmetry may depend on the extent to which the shock was anticipated in wage setting and then develops a framework in which the possibility of asymmetric persistence can be tested empirically. Using annual UK data, we obtain empirical evidence of significant asymmetry in the response of employment (and wages) to shocks. Small beneficial shocks are reflected entirely in wage increases, although sufficiently large favorable shocks also elicit increases in employment. In contrast, adverse shocks lead to reductions in both wages and employment. Evidence from Japan and West Germany provides some evidence of the presence of asymmetry, although this is less marked than in the United Kingdom. The policy implications are discussed.

A test of market clearing

Abstract This paper derives a simple Lagrange Multiplier test of whether market clearing is an acceptable assumption. The market clearing model is embedded within the disequilibrium model of Nickel (1984) and the restrictions necessary for market clearing to hold are tested.