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Market Power and Secular Macroeconomic Trends

Periodic Reporting for period 2 - MARKET POWER (Market Power and Secular Macroeconomic Trends)

Okres sprawozdawczy: 2021-12-01 do 2023-05-31

The problem of market power and dominant firm is one of the main issues economists are trying to tackle currently. We have seen a sharp rise since the 1980s, and we still have too little understanding of the causes and consequences. The research of the first part of this grant addresses this in detail.

Rising market power affects all citizens and has far-reaching implications for workers, for owners of small firms and for the dynamism and innovation economy-wide. We have built and estimated several models, as outlined in the proposal, with the objective of understanding the economic mechanism behind the rise of market power, both in terms of the causes and consequences. In addition, we have started to use those models to achieve our objective to quantify the impact market power has on society and on different groups in the economy: consumers, workers and the labor market, entrepreneurs and owners of startups. While a lot more work is needed, our initial estimates assign a very large cost to society from the high and increasing levels of market power that we are currently experiencing. We see that the cost of market power derives mainly from changes in the technology (scale economies as well as network effects in digital technologies) and that this has implications for business dynamism and wage stagnation. It also leads to an increase in inequality, especially from the top incomes.

The overall objective of this research is to measure, quantify and understand the causes and consequences of market power. And when we fully understand the mechanism as well as the quantitative importance, we aim to propose policies how to address this issue and aim to improve the well-being of workers, business owners and society at large.
We are in the middle of the grant and have made progress (documented in the Major Achievements) in accordance with the work plan. The results at this stage are promising and we already have had successes and some publications. The main publication studies the effect of market power on wage stagnation. Wages for the vast majority of workers have stagnated since the 1980s while, productivity has grown. In particular, this research investigates the role of two coexisting explanations based on rising market power: monopsony, where dominant firms exploit the limited mobility of their own workers to pay lower wages; and monopoly, where dominant firms charge too high prices for what they sell, which lowers production and the demand for labor, and hence equilibrium wages economy-wide. We have been using establishment data from the US Census Bureau and show that monopoly is rising between 1997 and 2016, whereas monopsony is stable. Both contribute to the decoupling of productivity and wage growth, with monopoly being the primary
determinant: monopoly accounts for 75% of wage stagnation, monopsony for 25%.
This research program goes beyond the state of the art by developing new methodologies to measure markups and to quantify the mechanism underlying the rising market power. We expect to find quantitative results that will inform the policy debate.