Pakistan Institute of Development Economics

Analyzing the Price Cost Markup and Its Behaviour over the Business Cycles in Case of Manufacturing Industries of Pakistan
Publication Year : 2015

The issue of imperfect competition in economic theory has been repeatedly discussed given its importance in the distribution of economic resources. In this study, market power measured by price over marginal cost markup has been assessed using the data of census of manufacturing industries (CMI) over the period 1971-2006. All the large scale manufacturing industries have been observed as charging prices over their marginal costs. Estimated markups are in the range of ten percent to seventy percent with the exception of tobacco industry wherein more than two hundred percent of markup has been charged over its marginal cost. Behaviour of markup over business cycle has been found acyclical. In the first approximation of cyclical behaviour of markups, both pro-cyclical and counter-cyclical along with acyclical markups have been estimated. But this behaviour of markups is not confirmed by our second approximation of variable markup that shows that there is no significant relationship between markups and business cycle. In addition, import penetration has been observed as disciplining factor for domestic manufacturing industries. Movement of imports over mean import penetration ratio has significant impact in reducing the markup of price over marginal cost charged by manufacturing industries.