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Quantifying Market Power and Business Dynamism in the Macroeconomy

Author

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  • Jan de Loecker
  • Jan Eeckhout
  • Simon Mongey

Abstract

We propose a general equilibrium model with oligopolistic output markets where two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching data on markups, labor reallocation and costs, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure yield positive welfare effects through reallocation and selection, but off-setting negative effects from dead-weight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify explain and decompose cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation via reallocation toward larger, more productive firms.

Suggested Citation

  • Jan de Loecker & Jan Eeckhout & Simon Mongey, 2021. "Quantifying Market Power and Business Dynamism in the Macroeconomy," Working Papers 1251, Barcelona School of Economics.
  • Handle: RePEc:bge:wpaper:1251
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    References listed on IDEAS

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    Cited by:

    1. Guimarães, Luís & Mazeda Gil, Pedro, 2022. "Explaining the Labor Share: Automation Vs Labor Market Institutions," Labour Economics, Elsevier, vol. 75(C).
    2. Vaziri, M., 2022. "Antitrust Law and Business Dynamism," Janeway Institute Working Papers 2219, Faculty of Economics, University of Cambridge.
    3. Samuel Brien, 2021. "Wealth Inequality, Uninsurable Entrepreneurial Risk and Firms Markup," Working Paper 1476, Economics Department, Queen's University.
    4. Renjie Bao & Jan De Loecker & Jan Eeckhout, 2022. "Are Managers Paid for Market Power?," NBER Working Papers 29918, National Bureau of Economic Research, Inc.
    5. Renjie Bao & Jan de Loecker & Jan Eeckhout, 2022. "Are Managers Paid for Market Power?," Working Papers 1340, Barcelona School of Economics.
    6. David W. Berger & Kyle F. Herkenhoff & Simon Mongey, 2022. "Minimum Wages, Efficiency and Welfare," NBER Working Papers 29662, National Bureau of Economic Research, Inc.
    7. Vaziri, M., 2022. "Antitrust Law and Business Dynamism," Cambridge Working Papers in Economics 2243, Faculty of Economics, University of Cambridge.
    8. Hugo Hopenhayn & Julian Neira & Rish Singhania, 2022. "From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share," Econometrica, Econometric Society, vol. 90(4), pages 1879-1914, July.
    9. Shubhdeep Deb & Jan Eeckhout & Aseem Patel & Lawrence Warren, 2022. "What Drives Wage Stagnation: Monopsony or Monopoly?," Working Papers 1361, Barcelona School of Economics.
    10. Kouvavas, Omiros & Osbat, Chiara & Reinelt, Timo & Vansteenkiste, Isabel, 2021. "Markups and inflation cyclicality in the euro area," Working Paper Series 2617, European Central Bank.

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    More about this item

    Keywords

    business dynamism; market power in the aggregate economy; technological change; market structure; reallocation; Endogenous markups; wage stagnation; labor share; passthrough;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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