Search costs, sticky prices and markups

Abstract

This article investigates how search costs, price stickiness and product durability influence the impact of inflation on firm markups. We provide evidence that each of these three factors plays an independent role in influencing the responsiveness of markups to inflation. Although we find that the direct effect of inflation on markups is negative, offsetting positive influences of inflation on markups arise in industries that produce durable experience goods with flexible prices. Thus, our results indicate that markups of industries producing nondurable search goods with sticky prices tend to experience unambiguously negative impacts from inflation.