This paper establishes an empirical link between firm capital structure and product-market competition using data from local supermarket competition. First, an event-study analysis of supermarket leveraged buyouts (LBO's) suggests that an LBO announcement increases the market value of the LBO chain's local rivals. Second, I show that supermarket chains were more likely to enter and expand in a local market if a large share of the incumbent firms in the local market undertook LBO's. The study suggests that leverage increases in the late 1980's led to softer product-market competition in this industry.

During recessions, output prices seem to rise relative to wages and raw-material prices. One explanation is that imperfectly competitive firms compete less aggressively during recessions. That is, markups of price over marginal cost are countercyclical. We present a model of countercyclical markups based on capital-market imperfections. During recessions, liquidity-constrained firms boost short-run profits by raising prices to cut their investments in market share. We provide evidence from the supermarket industry in support of this theory. During regional and macroeconomic recessions, more financially constrained supermarket chains raise their prices relative to less financially constrained chains.

This paper establishes an empirical link between firm capital structure and product-market competition using data from local supermarket competition. First, an event-study analysis of supermarket leveraged buyouts (LBOs) suggests that a LBO announcement increases the market value of the LBO chain's local rivals. Second, the author shows that supermarket chains were more likely to enter and expand in a local market if a large share of the incumbent firms in the local market undertook LBOs. The study suggests that leverage increases in the late 1980s led to softer product-market competition in this industry. Copyright 1995 by American Economic Association.

During business-cycle expansions, wages appear to rise relative to output prices.1 This fact is easy to square with real-business-cycle models which are based on the assumption that labor is more productive during expansions. But it is inconsistent with standard business-cycle theories based on aggregate demand fluctuations. In these models, fixed technology and diminishing returns imply that labor becomes less productive as output rises. Thus, in an expansion, wages should fall relative to output prices. Julio Rotemberg and Michael Woodford (1991, 1992) argue that imperfect competition can help to reconcile aggregatedemand theories of business cycles with observed procyclical real wages. If firms compete more aggressively during expansions, reducing the markup of price over marginal cost, the real wage can be driven up even if labor's marginal product falls. Countercyclical markups can therefore induce procyclical real wages. The difficult issue is understanding why markups would be countercyclical. Rotemberg and Garth Saloner (1986) and Rotemberg and Woodford (1991, 1992)hereafter referred to as RSW-claim that markups are countercyclical because it is harder for oligopolistic firms to sustain collusive prices during booms. When current demand is high relative to future demand, the incentive for any firm to cut its price rises because it becomes more valuable to capture current sales than to maintain collusion in the future. RSW present evidence that markups are indeed more countercyclical in more concentrated industries (where collusion can be more easily sustained). While this finding is consistent with countercyclical collusion, it is also consistent with any other theory in which imperfect competition induces firms to compete more aggressively during booms. In this paper, we analyze an alternative theory of countercyclical markups based on imperfect competition and capital-market imperfections. This theory has been suggested by Bruce Greenwald et al. (1984), Nils Gottfries (1991), and Paul Klemperer (1993). We present some preliminary evidence in an effort to distinguish this explanation from countercyclical collusion.

We examine retail and wholesale prices for a large supermarket chain over seven and one-half years. We find that prices fall on average during seasonal demand peaks for a product, largely due to changes in retail margins. Retail margins for specific goods fall during peak demand periods for that good, even if these periods do not coincide with aggregate demand peaks for the retailer. This is consistent with “loss-leader” models of retailer competition. Models stressing cyclical demand elasticities or cyclical firm conduct are less consistent with our findings. Manufacturer behavior plays a limited role in the countercyclicality of prices.

Firms' incentives to manufacture biased user reviews impede review usefulness. We examine the differences in reviews for a given hotel between two sites: Expedia.com (only a customer can post a review) and TripAdvisor.com (anyone can post). We argue that the net gains from promotional reviewing are highest for independent hotels with single-unit owners and lowest for branded chain hotels with multiunit owners. We demonstrate that the hotel neighbors of hotels with a high incentive to fake have more negative reviews on TripAdvisor relative to Expedia; hotels with a high incentive to fake have more positive reviews on TripAdvisor relative to Expedia. (JEL L15, L83, M31)