Market Polarization and the Phillips Curve

60 Pages Posted: 8 Feb 2021

See all articles by Javier Andrés

Javier Andrés

University of Valencia - Department of Economics

Oscar Arce

Banco de España

Pablo Burriel

Banco de España

Date Written: February 8, 2021

Abstract

The Phillips curve has flattened out over the last decades. We develop a model that rationalizes this phenomenon as a result of the observed increase in polarization in many industries, a process along which a few top firms gain an increasing share of their industry market. In the model, firms compete à la Bertrand and there is exit and endogenous market entry, as well as optimal up and downgrading of technology. Firms with larger market shares find optimal to dampen the response of their price changes, thus cushioning the shocks to their marginal costs through endogenous countercyclical markups. Thus, regardless of its causes (technology, competition, barriers to entry, etc.), the recent increase in polarization in many industries emerges in the model as the key factor in explaining the muted responses of inflation to movements in the output gap witnessed recently.

Keywords: firm heterogeneity, Bertrand competition, Phillips curve, market share

JEL Classification: E31, E52, L1

Suggested Citation

Andrés, Javier and Arce, Oscar and Burriel, Pablo, Market Polarization and the Phillips Curve (February 8, 2021). Banco de Espana Working Paper No. 2106, Available at SSRN: https://ssrn.com/abstract=3781594 or http://dx.doi.org/10.2139/ssrn.3781594

Javier Andrés (Contact Author)

University of Valencia - Department of Economics ( email )

E-46022 Valencia, Valencia E-46022
Spain
(34 96) 382 8260 (Phone)
(34 96) 382 8249 (Fax)

Oscar Arce

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Pablo Burriel

Banco de España ( email )

Madrid 28014
Spain

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