I examine price markups in monopolisticly-competitive markets that
experience fluctuations in demand because the economy experiences cyclical
fluctuations in productivity. Markups depend positively on the average
income of purchasers in the market. For a nondurable good average income of
purchasers is procyclical; so the markup is procyclical. For a durable good.
however. the average income of purchasers is likely to decrease in booms
because low income consumers of the good concentrate their purchases in boom
periods; so the markup is likely countercyclical. This is particularly true
for growing markets. I find markups make the aggregate economy fluctuate
more in response to productivity if goods are sufficiently durable.
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