Capacity utilization and market power

Abstract

In a monopolistic competition framework, we propose a dynamic model in which capacity underutilization is a macroeconomic equilibrium feature relying on a diversity of microe conomic situations. Capacity underutilization follows from microeconomic uncertainty at the time firms must decide on their productive capacity. We settle a relationship between capacity utilization and markups via the effect of capacity utilization rate changes on firms' market power. We show that such a relationship infiuences significantly the short run response of the economy to exogenous shocks. In particular, the same shock can have quite different short run effects depending on the characteristics of the initial stationary state (low or high capacity utilization rate).

Wage Growth Puzzle and Capacity Utilization

“…Bils and Cho (1993) show that cyclical variations in factor utilization help explain observed variations in real activity. Fagnart, Licardro and Sneessens (1995) link changes in the rate of capacity utilization to companies' market power. When demand for goods and services is subject to uncertainty, firms tend to prefer capacity underutilization to costly capital-labor adjustment in response to shocks.…”

Determining the capacity and its level of utilization in make-to-order manufacturing: A simple deterministic model for single-machine multiple-product case

“…They all have taken the processing time of products as the basic determining factor and great in number incorporated the set-ups into their calculations. Other important factors, such as defective rates, maintenance downtimes, gross or net product weights, have been either ignored or not fully taken into consideration [7,8,[16][17][18][19][20][21][22][23][24][25][26][27][28][29][30][31][32].…”

A real‐option rationale for investing in excess capacity

“…It seems to influence the price mark-ups over labor and material costs (Perry, 1966;Fagnart et al, 1997), as well as the effects of exogenous demand shocks on output prices (Aguerrevere, 2003). Excess capacity would seem to be undesirable, since it implies non-utilization of valuable productive resources (Smith, 1969).…”

“…'Excess capacity' (or capacity utilization) is an important issue in industrial organization and economics (Winston, 1974;Corrado and Mattey, 1997;Kim, 1999;Driver, 2000). It seems to influence the price mark-ups over labor and material costs (Perry, 1966;Fagnart et al, 1997), as well as the effects of exogenous demand shocks on output prices (Aguerrevere, 2003). Excess capacity would seem to be undesirable, since it implies non-utilization of valuable productive resources (Smith, 1969).…”