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The Aggregate Implications of Market Power

Project description

Measuring the reality of market power

A corporate giant’s ability to control the market price of goods or services refers to its market power. In theory, it’s how this company maintains prices above marginal costs by either increasing or constraining supply or demand. In practice, it can limit output, stifle innovation and create inefficiencies in the allocation of production. Market power can have both microeconomic and macroeconomic implications. The EU-funded M-POWER project will investigate the extent and effect of market power across sectors, regions and countries. To quantify the effects, the project will use new techniques to document mark-ups across firms in the entire economy and analyse the implications for both producers and consumers.


It has been long understood by economists that market power can negatively affect welfare by limiting output, stifling innovation, and introducing inefficiencies in the overall allocation of production. On the one hand, there is ample evidence from case-studies, that the presence of market power, in the form of explicit or implicit cartels and other practices of anti-competitive behavior, can lead to substantial damages to producers and consumers in a given market. On the other hand, very little is known about the broad cross- sectional and time-series patterns of market power across sectors, regions and countries. In addition, and perhaps more importantly, if market power is at all present, does it affect so-called aggregate outcomes in the product and factor markets? For example should the analysis of productivity growth and investment take into account the presence of market power, and does market power play a role in labor market outcomes, such as e.g. in the recently reported decline in the labor share across a variety of countries? This project aims to fill the gap in the literature by applying recently developed techniques to, first of all, systematically document markups, across firms in the entire economy, and secondly, to analyze the implications for producers and consumers in the economy at large, including both product and input markets. While the macroeconomic literature on misallocation has considered a variety of distortions that affect the allocation of inputs across plants, the project introduces an empirical framework to quantify the welfare loss from market power. Special attention is given to the impact on productive inefficiency. The overall aim is to better understand, and quantify, how market power affects the allocation of resources in the context of heterogeneous producers, and empirically quantify the trade-off of price and cost effects.


Net EU contribution
€ 1 575 000,00
Oude markt 13
3000 Leuven

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Vlaams Gewest Prov. Vlaams-Brabant Arr. Leuven
Activity type
Higher or Secondary Education Establishments
Other funding
€ 0,00

Beneficiaries (1)