Capacity utilization dynamics and market power

In an intertemporal general equilibrium model with imperfect competition, we settle a relationship between factor utilization and markups, via the effect of capacity utilization rate changes on firms' market power when the demand for goods is uncertain. When competition is imperfect, the existence of capacity constraints introduces a distinction between demand and sales price elasticities. At given demand price elasticity, the price elasticity of sales will be smaller the larger the aggregate capacity utilization rateo In such a framework, capacity utilization aifects the propagation mechanism of exogenous disturbances in two ways. The first effect is similar to the effect that bottlenecks and stockouts would have in a perfectly competitive setup; the second effect is related to imperfect competition and works through market power and optimal markup changes. We study these interactions and their implications for the dynamic behavior of sorne key macro variables in response to various "structural" changes. We show that the same shock can have quite different short run effects depending on the characteristics of the initial stationary state (low or high capacity utilization rate)

Capacity utilization dynamics and market power.

In an intertemporal general equilibrium model with imperfect competition, we settle a relationship between factor utilization and markups, via the effect of capacity utilization rate changes on firms' market power when the demand for goods is uncertain. When competition is imperfect, the existence of capacity constraints introduces a distinction between demand and sales price elasticities. At given demand price elasticity, the price elasticity of sales will be smaller the larger the aggregate capacity utilization rateo In such a framework, capacity utilization aifects the propagation mechanism of exogenous disturbances in two ways. The first effect is similar to the effect that bottlenecks and stockouts would have in a perfectly competitive setup; the second effect is related to imperfect competition and works through market power and optimal markup changes. We study these interactions and their implications for the dynamic behavior of sorne key macro variables in response to various "structural" changes. We show that the same shock can have quite different short run effects depending on the characteristics of the initial stationary state (low or high capacity utilization rate).Business Cycle; Capacity Utilization; Market Power; Markup Rate;

Idiosyncratic uncertainty, capacity utilization and the business cycle

In a stochastic dynamic general equilibrium framework, we introduce the concept of variable capacity utilization (as opposed to the concept of capital utilization). We consider an economy where imperfectly competitive firms use a putty-clay technology and decide on their productive capacity level under uncertainty. An idiosyncratic uncertainty about the exact position of the demand curve facedby each firm explains why sorne productive capacities may remain idle in the sequel and why individual capacity utilization rates differ across firms. The capacity underutilization at the aggregate level thus hides a diversity of microeconomic situations. The variability of the capacity utilization allows for a good description of sorne of the main stylized facts of the business cycle, propagates and magnifies aggregate technological shocks and generates endogenous persistence (Le., the output growth rate displays positive serial correlation)

The Competitiveness of Nations: Economic Growth in the ECE Region

Why do some countries grow much faster, and have much better trade performance, than other countries? What are the crucial factors behind such differences, and what can governments do in order to improve the relative position of their economies? This paper outlines a synthetic framework, based on Schumpeterian logic, for analysing such questions. Four different aspects of competitiveness are identified; technology, costs, capacity and demand. The framework is applied to a sample of 49 countries between 1993 and 2001.

Assessing the Consequences of Natural Disasters on Production Networks: A Disaggregated Approach

This article proposes a framework to investigate the consequences of natural disasters. This framework is based on the disaggregation of Input-Output tables at the business level, through the representation of the regional economy as a network of production units. This framework accounts for (i) limits in business production capacity; (ii) forward propagations through input shortages; and (iii) backward propagations through decreases in demand. Adaptive behaviors are included, with the possibility for businesses to replace failed suppliers, entailing changes in the network structure. This framework suggests that disaster costs depend on the heterogeneity of losses and on the structure of the affected economic network. The model reproduces economic collapse, suggesting that it may help understand the difference between limited-consequence disasters and disasters leading to systemic failure.Natural disasters, Economic impacts, Economic Network