The Macroeconomics of Market Power
Saturday, Jan. 7, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Corina Boar, New York University
The Life-cycle of Concentrated Industries
AbstractWe propose a model of the life cycle of oligopolistic industries where strong increasing returns leads to concentration. In the model, randomly arriving inventions spur innovation races, i.e., the entry of firms to develop products using a new invention. The life cycle of an industry features an initial growth in the number of firms, followed by a shake-out as some innovators succeed and the majority exits. In the long run, an industry is characterized by a concentrated market structure. We show that the industry life cycle is inefficient. Entering firms do not internalize the total surplus they generate and incumbents stay in the market for too long as they try to steal business from others. Therefore, the optimal industry regulation varies over the life cycle. The government should foster firm entry in a young industry and accelerate the shakeout as the industry matures. We conclude with a quantitative exploration where we discipline our model using novel US data on the life cycle of data-intensive industries, such as B2B online marketplaces, FinTech, or computer vision industries.
Good Rents versus Bad Rents: R&D Misallocation and Growth
AbstractFirm price-cost markups may reflect (a) higher step sizes from quality innovations that confer significant knowledge spillovers onto other firms, and/or (b) higher process efficiency than competing firms. We write down an endogenous growth model in which, compared with the laissez-faire equilibrium, the social planner would generally like to reallocate research resources towards high markup firms in case (a) so as to enhance knowledge spillovers but not in case (b). We then exploit unit price variation across high versus low markup firms in French manufacturing to assess the relative strength of these two forces. Viewed through the lens of our model, the French data imply that large firms typically display high process efficiency and low step size. The policy implication is that, to reach the social optimum, French research subsidies should favor only those high markup firms with “good” rents.
Are Managers Paid for Market Power?
AbstractTo answer the question whether managers are paid for market power, we propose a theory of executive compensation in an economy where firms have market power, and the market for managers is competitive. We identify two distinct channels that contribute to manager pay in the model: market power and firm size. Both increase the profitability of the firm, which makes managers more valuable as it increases their marginal product. Using data on executive compensation from Compustat, we quantitatively analyze how market power affects Manager Pay and how it changes over time. We attribute on average 45.8% of Manager Pay to market power, from 38.0% in 1994 to 48.8% in 2019. Over this period, market power accounts for 57.8% of growth. We also find there is a lot of heterogeneity within the distribution of managers. For the top managers, 80.3% of their pay in 2019 is due to market power. Top managers are hired disproportionately by firms with market power, and they get rewarded for it, increasingly so.
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy