A markup occurs when a price is set above the marginal cost of production, and it can affect the output pricing behavior. According to studies done on the topic, because global competition has increased, markups have declined over time. According to Willis, there are three factors of the U.S trade that have contributed to the increase of global competition: increase in the percentage of imports in total consumption of durable goods (except automobiles), increase in the percentage of imports in total consumption of nondurable goods, and increase in the percentage of imports in capital goods expenditures (except automobiles).
Willis starts the section of “Frequency of Adjustment” with the results of a few survey questions to various firms, interested mainly in what affects the decision of a price change and its implementation. Many firms don’t change prices because of the costs of changing them and because of the impact that it would cause in customers. Other firms said that they don’t change price regularly because of adjustment costs such as new catalogs, new price lists, etc.
However, because of technological changes and advances, costs of price adjustment have decreased, and there are three reasons for it: 1. Scanning technology. It is much easier to change the price of an item by just scanning it, and not having to deal with changing the price tags of each of the items. 2. Information technology has allowed easier and more organized record keeping and access data in a firm. 3. Antagonizing customers; for example, now days, people can easily compare prices over the Internet.
In the last section, Willis concludes saying that the changes he spoke about throughout the article affect pricing decisions and inflation by “decreasing the volatility of inflation over the business cycle.” He also says that inflation won’t be as bad as it’s been before because the marginal cost of labor won’t fall too quickly in a downturn because employment for permanent employees would increase, and the employment for temporary employees would decrease.
Conclusion
In conclusion, Willis showed in his article how inflation persistence and volatility work, being relative to each other (if one decreases, the other will decrease as well). Demonstrating the relationship between the two terms, he also showed how the changes he discussed can easily give arise to a decrease in the volatility and persistence of inflation. Input costs are a very important section in this article because the inputs of production (materials, labor and capital) are the basis of any business. All three inputs of production have being going through changes for the past 2 decades. Labor changed by employing more temporary than permanent positions; capital has changed by lowering the use of bank loans and increasing the use of commercial paper and corporate bonds; and materials have changed by using information technology and/or databases.
He also talks about competition in the market in the “markup” section. Informing us what a markup is, he implies how important it is to changes in inflation by saying that global competition influences the decline in markups. The responses to the survey that Willis includes in the article help readers understand what he was talking about and the message he wanted to get across. He wants to inform why firms don’t like to make price changes, and it seems like information technology has made it much easier for firms to be able to change the prices of their merchandise without having as many expenses as before. Willis concludes explaining how all the changes he spoke about relate to the reduction of persistence of inflation.
