Investment-Goods Market Power and Capital Accumulation

We develop a model of capital accumulation in an economy that sources investment goods from large firms with market power. We model investment-goods producers as a dynamic oligopoly with increasing marginal cost and characterize the equilibrium with a dynamic markup rule. We use this characterization to analyze the dynamics of investment and prices. The markup on investment goods acts as an endogenous adjustment cost, which decreases as the economy grows but permanently distorts the steady state. We calibrate the model to simulate the post-2020 shocks to demand for equipment and semiconductors. The calibrated model attributes the observed increase in the price of equipment mainly to increasing marginal costs and to a smaller extent to increasing markups. We then analyze the effects of policy interventions to expand capacity and address market power. Finally, we extend the model to investment-specific technological progress due to learning by doing.