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Market Structure and Monetary Non-Neutrality

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  • Simon Mongey

    (NYU)

Abstract

Canonical macroeconomic models of pricing under nominal rigidities assume markets consist of atomistic firms. Most US retail markets are dominated by a few large firms. To bridge this gap, I extend an equilibrium menu cost model to allow for a continuum of sectors with two large firms in each sector. Compared to a model with monopolistically competitive markets, and calibrated to the same good-level data on price adjustment, the duopoly model generates output responses to monetary shocks that are more than twice as large. Firm-level prices respond equally to idiosyncratic shocks, but less to aggregate shocks in the calibrated duopoly model. Under duopoly, the response of low priced firms to an increase in money is dampened: a falling real price at its competitor weakens both the incentive to increase prices, and price conditional on adjustment. The dynamic duopoly model also implies (i) large first order welfare losses from nominal rigidities, (ii) lower menu costs, (iii) a U-shaped relationship between market concentration and price flexibility, forwhich I find strong evidence in the data, (iv) a source of downward bias in markup estimates attained from inverting a static oligopoly model.

Suggested Citation

  • Simon Mongey, 2017. "Market Structure and Monetary Non-Neutrality," 2017 Meeting Papers 184, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:184
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    References listed on IDEAS

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    1. repec:bin:bpeajo:v:48:y:2017:i:2017-02:p:89-190 is not listed on IDEAS
    2. Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    3. S. Dupraz, 2017. "A Kinked-Demand Theory of Price Rigidity," Working papers 656, Banque de France.
    4. Gutierrez, German & Philippon, Thomas, 2017. "Declining Competition and Investment in the U.S," CEPR Discussion Papers 12536, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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