Quantifying Market Power and Business Dynamism in the Macroeconomy

• Authors: Jan Eeckhout.
• BSE Working Paper: 1251 | April 21
• Keywords: Endogenous markups , labor share , technological change , market structure , business dynamism , market power in the aggregate economy , reallocation , wage stagnation , passthrough
• JEL codes: C6, D4, D5, L1
• Endogenous markups
• labor share
• technological change
• market structure
• business dynamism
• market power in the aggregate economy
• reallocation
• wage stagnation
• passthrough

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.