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Business Cycle Implications of Firm Market Power in Labor and Product Markets

Author

Listed:
  • Sami Alpanda

    (University of Central Florida, Department of Economics)

  • Sarah Zubairy

    (Texas A&M University, Department of Economics)

Abstract

In this paper, we analyze the business cycle implications of firms having oligopsony power in labor markets, as well as oligopoly power in product markets, within the context of a New Keynesian dynamic stochastic general equilibrium model with firm entry and exit. Relative to the standard setup with monopolistic competition in both goods and labor markets, the strategic interaction between intermediate goods firms in the current setup results in larger price markups as well as wage markdowns, while the slopes of the aggregate price and wage Phillips curves become flatter. These effects are strengthened in a strongly non-linear fashion as the number of firms in each sector decline. Oligopsonistic labor markets also render wage shocks expansionary, unlike in the standard setup. Results indicate that a secular increase in industry concentration would not only reduce the labor share of income, but also weaken the pass-through from firms' marginal costs to prices and from productivity increases to real wages.

Suggested Citation

  • Sami Alpanda & Sarah Zubairy, 2021. "Business Cycle Implications of Firm Market Power in Labor and Product Markets," Working Papers 20210429-001, Texas A&M University, Department of Economics.
    • Handle: RePEc:txm:wpaper:20210429-001
    as

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    File URL: https://pvsessions.tamu.edu/RePEc/Alpanda_Zubairy_MarketPower.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Market power; oligopoly; oligopsony; New Keynesian DSGE model; entry-exit.;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • 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

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