Imperfect Competition in Product and Labor Markets. A Quantitative Analysis
54 Pages Posted: 11 Jan 2018 Last revised: 14 Nov 2020
Date Written: January 8, 2018
We disentangle the extent of imperfect competition in product and labor markets using plant-level data. We derive a formula for the ratio between markups and markdowns assuming cost-minimizing firms that face upward-sloping labor supply and downward-sloping product demand curves. We then separate this combined measure of market power by estimating firm-level labor supply elasticities instrumenting wages with a different set of instruments including the use of intermediate inputs, input price shocks, and TFP shocks. Our results suggest that both markets exhibit imperfect competition, but the variation is mainly driven by markups. We also estimate the relative gains of removing market power dispersion on allocative efficiency, finding that markups are more important on TFP than markdowns.
Keywords: Imperfect Competition, Markups, Markdowns, Misallocation
JEL Classification: L1, J42, D22
Suggested Citation: Suggested Citation