A Puzzling Story: The Cyclical Behavior of Price-cost Margins.

Abstract

Some recent empirical studies reveal countercyclical price-cost margins. From a microeconomic point of view this is not plausible because for the overwhelming number of industries, profits are highest in boom. As indicators of profitability price-cost margins should be procyclical. However, it will be shown that a margin relying on marginal cost can behave countercyclically or remains constant even with procyclical profits.A margin based on average cost is a better indicator of the development of profits. Therefore, empirical analysts should not regard different definitions of price-cost margins as equivalent.Price-cost margins, profit indicators, demand variations and pricing