Endogenous Market Structures and the Business Cycle

33 Pages Posted: 17 Nov 2010

See all articles by Federico Etro

Federico Etro

Florence School of Economics and Management

Andrea Colciago

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Abstract

We characterise endogenous market structures under Bertrand and Cournot competition in a DSGE model. Short-run mark ups vary countercyclically because of the impact of entry on competition. Long-run mark ups are decreasing in the discount factor and in productivity, and increasing in the exit rate and in the entry costs. Dynamic inefficiency can emerge due to excessive entry under Cournot competition. Positive temporary shocks attract entry, which strengthens competition so as to reduce the mark ups temporarily and increase real wages: this competition effect creates an intertemporal substitution effect which boosts consumption and employment. Endogenous market structures improve the ability of a flexible prices model in matching impulse response functions and second moments for US data.

Suggested Citation

Etro, Federico and Colciago, Andrea, Endogenous Market Structures and the Business Cycle. The Economic Journal, Vol. 120, Issue 549, pp. 1201-1233, December 2010, Available at SSRN: https://ssrn.com/abstract=1710336 or http://dx.doi.org/10.1111/j.1468-0297.2010.02384.x

Federico Etro

Florence School of Economics and Management ( email )

Via delle Pandette 32
Firenze, Tuscany 30123
Italy

Andrea Colciago

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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