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Markup cycles, dynamic misallocation, and amplification

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  • Opp, Marcus M.
  • Parlour, Christine A.
  • Walden, Johan

Abstract

We develop a tractable dynamic general equilibrium model of oligopolistic competition with a continuum of heterogeneous industries. Industries are exposed to aggregate and industry-specific productivity shocks. Firms in each industry set value-maximizing state-contingent markups, taking as given the behavior of all other industries. When consumers are risk-averse, industry markups are countercyclical with regards to the industry-specific component, but may be procyclical with regards to the aggregate shock. The general equilibrium dispersion of markups implied by the optimization of heterogeneous industries creates misallocation of labor across industries. The misallocation, in turn, generates aggregate welfare losses state-by-state that feed back into the industry problem via a representative agent's marginal utility of aggregate consumption. Misallocation dynamics may transmit industry-specific shocks, or amplify small aggregate shocks, and so lead to aggregate fluctuations through these feedback effects.

Suggested Citation

  • Opp, Marcus M. & Parlour, Christine A. & Walden, Johan, 2014. "Markup cycles, dynamic misallocation, and amplification," Journal of Economic Theory, Elsevier, vol. 154(C), pages 126-161.
    • Handle: RePEc:eee:jetheo:v:154:y:2014:i:c:p:126-161
    DOI: 10.1016/j.jet.2014.09.001
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    2. Savagar, Anthony, 2021. "Measured productivity with endogenous markups and economic profits," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    3. Sungki Hong, 2019. "Customer Capital, Markup Cyclicality, and Amplification," 2019 Meeting Papers 959, Society for Economic Dynamics.
    4. Xu, Cheng-Gang & Guo, Di & Jiang, Kun & Yang, Xiyi, 2020. "Geographic Clustering and Resource Reallocation Across Firms in Chinese Industries," CEPR Discussion Papers 14506, C.E.P.R. Discussion Papers.
    5. Winston Wei Dou & Yan Ji, 2021. "External Financing and Customer Capital: A Financial Theory of Markups," Management Science, INFORMS, vol. 67(9), pages 5569-5585, September.
    6. Jumpei Hamamura & Sho Hayakawa, 2024. "Optimal choice of relative performance indicator and product market competition," Economics and Business Letters, Oviedo University Press, vol. 13(3), pages 112-121.
    7. Giusto, Andrea & İşcan, Talan B., 2019. "Market Power And The Aggregate Saving Rate," Macroeconomic Dynamics, Cambridge University Press, vol. 23(6), pages 2269-2297, September.
    8. Dou, Winston Wei & Ji, Yan & Wu, Wei, 2021. "Competition, profitability, and discount rates," Journal of Financial Economics, Elsevier, vol. 140(2), pages 582-620.
    9. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2019. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 140-174, October.
    10. Chrysovalantis Amountzias, 2021. "Markup cyclicality, competition and liquidity constraints: Evidence from a panel VAR analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3696-3718, July.
    11. Guo, Di & Jiang, Kun & Xu, Chenggang & Yang, Xiyi, 2023. "Geographic clusters, regional productivity and resource reallocation across firms: Evidence from China," Research Policy, Elsevier, vol. 52(2).

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    More about this item

    Keywords

    Oligopolistic competition; Markup cycles; Allocative efficiency; Dynamic games; DSGE models;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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