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Market power amplifies the price effects of demand shocks

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  • Menezes, Flavio M.
  • Quiggin, John

Abstract

In this paper, a model of competition in supply functions is used to analyse the relationship between market power and inflation. The model encompasses a range of market structures with Cournot and Bertand competition as polar cases. To the extent that inflation is driven by demand shocks, firms with market power are likely to respond by increasing margins, and thereby amplifying the inflationary impact of higher demand. This analysis is relevant to debates about the role of market power in recent US inflation.

Suggested Citation

  • Menezes, Flavio M. & Quiggin, John, 2022. "Market power amplifies the price effects of demand shocks," Economics Letters, Elsevier, vol. 221(C).
    • Handle: RePEc:eee:ecolet:v:221:y:2022:i:c:s0165176522003822
    DOI: 10.1016/j.econlet.2022.110908
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    Cited by:

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    2. St-Pierre, Marc, 2023. "On market power and inflation," Economics Letters, Elsevier, vol. 226(C).

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