Yip, Paul Sau-Leung
(1991)
Macroeconomic implications of customer-supplier and worker-employer relationships.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis investigates a few examples of customer-supplier and worker-employer relationships which are thought to be important to macroeconomic analysis. Among the literature on sticky price, we suggest that the theory of mark-up pricing and the theory of customer-supplier relationships advocated by Okun (1981), deserve more attention. We also suggest that there are at least three hypotheses implicit in the mark-up equation: (1) a sticky pricing response to demand shocks; (2) a relatively fast pricing response to cost shocks; and (3) 1 % change in average cost will cause an equiproportionate rise in price. In Chapter 2, a reputation cost of changing price is used to summarize Okun's discussion on suppliers' tendency to pledge the constancy of price for some reasonably long period (a type of customer-supplier relationship). A microfoundation model is then built to investigate the three hypothesis in details. With regard to the first hypothesis, it is shown that (a) the reputation cost of changing price; (b) uncertainties about the persistence and generality of an observed demand shock; and (c) their interactions can jointly account for an extensive degree of price stickiness. We also explain that such a modelling of price stickiness could be more convincing than that by the Menu Cost Hypothesis. With regard to the second and third hypotheses, our conclusion is positive in the sense that it is a good approximation, but negative in the sense that it is at most an approximation. We then specify the conditions under which the mark-up equation can be used in macroeconomic analysis. In our discussion of hypothesis 2, we also touched upon the evolution of the practice of cost-oriented, as opposed to demand-oriented, pricing. In Chapter 3, we start with the justification of an implicit, non-binding guarantee of employment for those within the firms (a type of worker-employer relationship). A dynamic programming model is then built to investigate the employment response of the representative employer to demand shocks. It is found that: (a) In the case of mild negative demand shock, the producer will hoard the excessive amount of labour, and production effort will be the variable of adjustment; (b) In the case of adverse negative demand shock, the producer will break the implicit guarantee of employment and make considerable amount of layoffs. From the point of view of maintaining employment, it is always better to stimulate the economy before, rather than after, the layoffs. Mild stimulation policies after the layoffs will have no effect on employment. Chapter 4 attempts to provide an estimate of the cost of changing price. It was found that the cost is much larger than can be explained by the Menu Cost Hypothesis. The estimation also provides some evidence against the Normal Cost Hypothesis. Finally, Chapter 5 is a simulation exercise to check whether Caplin and Spulber's neutrality result, arising from the disappearance of price stickiness on aggregation, can be applied to some more general specifications.
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