ABSTRACT
The behaviour of the price-cost relationship is of interest both to industrial economists and macroeconomists. Industrial economists have traditionally been concerned with the question of how the relationship between price and cost varies across industries and what these variations suggest about the impact of market structure on pricing behaviour. For macroeconomists, changes in price relative to cost, particularly over the cycle, convey useful information about the dynamics of wage and price adjustment during the inflation process. In this chapter we consider the problem mainly from the macroeconomic perspective, but using disaggregated data and allowing for microeconomic considerations. What we are concerned with in particular is the extent to which supply constraints, both labour and capital, affect the relationship between price and cost movements over time. To our knowledge, this is the first systematic attempt to test for the influences of different supply constraints on industrial pricing in the UK, though the subject has been addressed in general terms in Bean and Gavosto (1990).2 Supply constraints are often omitted from economic models because they tend to make analysis intractable. Nevertheless, we show that they are important determinants of price at industry level.3
