Trigger Strategies and the Cyclicality of Markups

An environment capable of generating both counter- and procyclical movements in markups through the interaction of opposing factors is considered. This framework can account for observed variations in the cyclical behavior of markups across industries. Technology shocks and endogenous labor supply are introduced into a model with implicit collusion and periodic reversion to non-collusive behavior. Within either a collusive or non-collusive regime, markups are positively correlated with output. Switches between regimes, however, result in opposing movements in markups and output, reducing the overall correlation of the two series. Our findings imply that weak cyclicality of markups is not inconsistent with a large role for changes in market power in accounting for cyclical fluctuations. Offsetting effects may make the overall correlation of the markup with output low, while still allowing for the instability of the cartel to have important cyclical implications.