IDEAS home Printed from https://ideas.repec.org/p/rba/rbaacp/acp2019-07.html
   My bibliography  Save this paper

The Rise of Market Power and the Macroeconomic Implications

Author

Listed:
  • Jan Eeckhout

Abstract

We document the evolution of market power based on firm-level data for the U.S. economy since 1955. We measure both markups and profitability. In 1980, aggregate markups start to rise from 21% above marginal cost to 61% now. The increase is driven mainly by the upper tail of the markup distribution: the upper percentiles have increased sharply. Quite strikingly, the median is unchanged. In addition to the fattening upper tail of the markup distribution, there is reallocation of market share from low- to high-markup firms. This rise occurs mostly within industry. We also find an increase in the average profit rate from 1% to 8%. Although there is also an increase in overhead costs, the markup increase is in excess of overhead. We discuss the macroeconomic implications of an increase in average market power, which can account for a number of secular trends in the past four decades, most notably the declining labor and capital shares as well as the decrease in labor market dynamism.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jan Eeckhout, 2019. "The Rise of Market Power and the Macroeconomic Implications," RBA Annual Conference Papers acp2019-07, Reserve Bank of Australia, revised Jul 2019.
  • Handle: RePEc:rba:rbaacp:acp2019-07
    Note: Paper presented at the RBA's annual conference 'Low Wage Growth', Sydney, 4–5 April 2019.
    as

    Download full text from publisher

    File URL: https://www.rba.gov.au/publications/confs/2019/pdf/rba-conference-2019-eeckhout.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert J. Gordon, 2016. "The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War," Economics Books, Princeton University Press, edition 1, number 10544, October.
    2. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180, National Bureau of Economic Research, Inc.
    3. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    4. Henry Hyatt & James Spletzer, 2013. "The recent decline in employment dynamics," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-21, December.
    5. Greg Kaplan & Sam Schulhofer‐Wohl, 2017. "Understanding The Long‐Run Decline In Interstate Migration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58, pages 57-94, February.
    6. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
    7. Jan De Loecker, 2011. "Product Differentiation, Multiproduct Firms, and Estimating the Impact of Trade Liberalization on Productivity," Econometrica, Econometric Society, vol. 79(5), pages 1407-1451, September.
    8. Chen Yeh, 2017. "Are firm-level idiosyncratic shocks important for U.S. aggregate volatility?," Working Papers 17-23, Center for Economic Studies, U.S. Census Bureau.
    9. Antràs Pol, 2004. "Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-36, April.
    10. Jan De Loecker & Paul T. Scott, 2016. "Estimating market power Evidence from the US Brewing Industry," NBER Working Papers 22957, National Bureau of Economic Research, Inc.
    11. Amit Gandhi & Salvador Navarro & David Rivers, 2011. "On the Identification of Production Functions: How Heterogeneous is Productivity?," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20119, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    12. Wolfgang Keller & Stephen R. Yeaple, 2009. "Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States," The Review of Economics and Statistics, MIT Press, vol. 91(4), pages 821-831, November.
    13. Mitsukuni Nishida & Amil Petrin & Martin Rotemberg & T. Kirk White, 2013. "Are We Undercounting Reallocation’s Contribution to Growth?," Working Papers 13-55, Center for Economic Studies, U.S. Census Bureau.
    14. Dongya Koh & Raül Santaeulàlia‐Llopis & Yu Zheng, 2020. "Labor Share Decline and Intellectual Property Products Capital," Econometrica, Econometric Society, vol. 88(6), pages 2609-2628, November.
    15. Bruce Fallick & Charles Fleischman & Jonathan Pingle, 2010. "The Effect of Population Aging on the Aggregate Labor Market," NBER Chapters, in: Labor in the New Economy, pages 377-417, National Bureau of Economic Research, Inc.
    16. Sharat Ganapati, 2018. "The Modern Wholesaler: Global Sourcing, Domestic Distribution, and Scale Economies," Working Papers 18-49, Center for Economic Studies, U.S. Census Bureau.
    17. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    18. Raleigh, 2008. "Aashe 2008," Journal of Education for Sustainable Development, , vol. 2(2), pages 99-100, September.
    19. Robert E. Hall, 2018. "New Evidence on the Markup of Prices over Marginal Costs and the Role of Mega-Firms in the US Economy," NBER Working Papers 24574, National Bureau of Economic Research, Inc.
    20. Jan De Loecker & Jan Eeckhout & Gabriel Unger, 2020. "The Rise of Market Power and the Macroeconomic Implications [“Econometric Tools for Analyzing Market Outcomes”]," The Quarterly Journal of Economics, Oxford University Press, vol. 135(2), pages 561-644.
    21. Roc Armenter, 2015. "A bit of a miracle no more: the decline of the labor share," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 1-9.
    22. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    23. Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October.
    24. Fatih Karahan & Benjamin Pugsley & Aysegül Sahin, 2019. "Demographic Origins of the Startup Deficit," Working Papers 19-21, Center for Economic Studies, U.S. Census Bureau.
    25. Nicolas Vincent & Matthias Kehrig, 2017. "Growing Productivity without Growing Wages: The Micro-Level Anatomy of the Aggregate Labor Share Decline," 2017 Meeting Papers 739, Society for Economic Dynamics.
    26. David Berger & Joseph Vavra, 2017. "Shocks vs. Responsiveness: What Drives Time-Varying Dispersion?," NBER Working Papers 23143, National Bureau of Economic Research, Inc.
    27. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    28. David Genesove & Wallace P. Mullin, 1998. "Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 355-377, Summer.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Matias Covarrubias & Germán Gutiérrez & Thomas Philippon, 2019. "From Good to Bad Concentration? U.S. Industries over the Past 30 Years," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 1-46, National Bureau of Economic Research, Inc.
    2. Emilien Gouin-Bonenfant, 2018. "Productivity Dispersion, Between-firm Competition and the Labor Share," 2018 Meeting Papers 1171, Society for Economic Dynamics.
    3. Ryan A. Decker & John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2018. "Changing Business Dynamism and Productivity: Shocks vs. Responsiveness," NBER Working Papers 24236, National Bureau of Economic Research, Inc.
    4. Germán Gutiérrez & Thomas Philippon, 2019. "The Failure of Free Entry," NBER Working Papers 26001, National Bureau of Economic Research, Inc.
    5. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," Temi di discussione (Economic working papers) 1168, Bank of Italy, Economic Research and International Relations Area.
    6. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," BIS Working Papers 711, Bank for International Settlements.
    7. Francesco Manaresi & Nicola Pierri, 2019. "Credit Supply and Productivity Growth," IMF Working Papers 2019/107, International Monetary Fund.
    8. German Gutierrez, 2018. "Investigating Global Labor and Pro t Shares," 2018 Meeting Papers 165, Society for Economic Dynamics.
    9. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1445-1488, December.
    10. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 135(1), pages 105-163.
    11. Jaumandreu, Jordi & Lin, Shuheng, 2018. "Prices under Innovation: Evidence from Manufacturing Firms," CEPR Discussion Papers 13146, C.E.P.R. Discussion Papers.
    12. R. Monin & M. Suarez Castillo, 2020. "Product switching, market power and distance to core competency," Documents de Travail de l'Insee - INSEE Working Papers g2020-06, Institut National de la Statistique et des Etudes Economiques.
    13. Zach Flynn, 2020. "Identifying productivity when it is a factor of production," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 496-530, June.
    14. David Autor & David Dorn & Lawrence F Katz & Christina Patterson & John Van Reenen, 2020. "The Fall of the Labor Share and the Rise of Superstar Firms [“Automation and New Tasks: How Technology Displaces and Reinstates Labor”]," The Quarterly Journal of Economics, Oxford University Press, vol. 135(2), pages 645-709.
    15. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-365, June.
    16. Emmanuel Farhi & Francois Gourio, 2018. "Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 147-250.
    17. Germán Gutiérrez & Thomas Philippon, 2017. "Declining Competition and Investment in the U.S," NBER Working Papers 23583, National Bureau of Economic Research, Inc.
    18. Zhang, Hongsong, 2019. "Non-neutral technology, firm heterogeneity, and labor demand," Journal of Development Economics, Elsevier, vol. 140(C), pages 145-168.
    19. David Baqaee & Emmanuel Farhi, 2020. "Entry vs. Rents," NBER Working Papers 27140, National Bureau of Economic Research, Inc.
    20. Alon, Titan & Berger, David & Dent, Robert & Pugsley, Benjamin, 2018. "Older and slower: The startup deficit’s lasting effects on aggregate productivity growth," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 68-85.

    More about this item

    Keywords

    wages; market power; mark-ups; technology; market dynamism; market structure;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • K2 - Law and Economics - - Regulation and Business Law
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rba:rbaacp:acp2019-07. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew). General contact details of provider: https://edirc.repec.org/data/rbagvau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.