Rising Marginal Costs, Rising Prices?
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arXiv
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| Main Authors: | , |
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| Format: | Preprint |
| Published: |
2025
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| _version_ | 1866929706175037440 |
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| author | Kariel, Joel Savagar, Anthony |
| author_facet | Kariel, Joel Savagar, Anthony |
| contents | We present empirical evidence on the relationship between demand shocks and price changes, conditional on returns to scale. We find that in industries with decreasing returns to scale, demand increases (which raise costs) correspond to price increases. Whereas, in industries with increasing returns to scale, demand increases (which lower costs) correspond to stable prices. We interpret the results with a theory of imperfect competition and returns to scale. For prices to remain stable following a cost decrease, markups necessarily rise. For prices to increase as cost increases, it is not necessary for markups to change but does not preclude their role. From a macroeconomic perspective, our results imply that inflation dynamics and the effectiveness of monetary policy depend on market structures. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2502_05898 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Rising Marginal Costs, Rising Prices? Kariel, Joel Savagar, Anthony General Economics Economics We present empirical evidence on the relationship between demand shocks and price changes, conditional on returns to scale. We find that in industries with decreasing returns to scale, demand increases (which raise costs) correspond to price increases. Whereas, in industries with increasing returns to scale, demand increases (which lower costs) correspond to stable prices. We interpret the results with a theory of imperfect competition and returns to scale. For prices to remain stable following a cost decrease, markups necessarily rise. For prices to increase as cost increases, it is not necessary for markups to change but does not preclude their role. From a macroeconomic perspective, our results imply that inflation dynamics and the effectiveness of monetary policy depend on market structures. |
| title | Rising Marginal Costs, Rising Prices? |
| topic | General Economics Economics |
| url | https://arxiv.org/abs/2502.05898 |