Quantifying Market Power and Business Dynamism

68 Pages Posted: 30 Apr 2021

See all articles by Jan De Loecker

Jan De Loecker

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jan Eeckhout

University College London - Department of Economics

Simon Mongey

University of Chicago

Date Written: April 30, 2021

Abstract

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.

Keywords: Business Dynamism, Market Power in the Aggregate Economy, Technological Change, Market Structure, Reallocation, Endogenous Markups, Wage Stagnation, Labor Share, Passthrough

JEL Classification: C6, D4, D5, L1

Suggested Citation

De Loecker, Jan and Eeckhout, Jan and Mongey, Simon, Quantifying Market Power and Business Dynamism (April 30, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-54, Available at SSRN: https://ssrn.com/abstract=3837433 or http://dx.doi.org/10.2139/ssrn.3837433

Jan De Loecker

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://pages.stern.nyu.edu/~jdeloeck/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jan Eeckhout

University College London - Department of Economics ( email )

30 Gordon Street
London WC1E 6BT, WC1H 0AX
United Kingdom

Simon Mongey (Contact Author)

University of Chicago ( email )

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