This paper develops a microfoundation for the cyclical profit squeeze theory of crisis. An optimal cyclical mark-up pricing policy is derived. The mark-up rises from initial trough until midexpansion and then declines until the terminal trough. The necessary and sufficient conditions for the resulting decline in the profit rate are the capital-labor struggle which determines the behavior of costs and the competition among capitals which restricts rising costs from being fully passed on. It is also shown that this optimal mark-up behavior serves as a microfoundation for a profit squeeze theory of the business cycle.
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Jonathan P. Goldstein (1985) studied this question.
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