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

Abstract

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 an estimated New Keynesian dynamic stochastic general equilibrium model with firm entry and exit. The strategic interaction between firms results in larger price markups as well as wage markdowns, while the slopes of the aggregate price and wage Phillips curves become flatter, relative to the standard setup with monopolistic competition in goods and labor markets, and 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. Our 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.

Keywords: Market Power, oligopoly, oligopsony, New Keynesian DSGE model, entry-exit.