Oligopoly, Macroeconomic Performance, and Competition Policy

By José Azar & Xavier Vives (University of Navarra)

We develop a macroeconomic framework in which firms are large and have market power with respect to both products and factors. Each firm maximizes a share-weighted average of shareholder utilities, which makes the equilibrium independent of price normalization. In a one sector economy, if returns to scale are non-increasing, then an increase in effective market concentration (which accounts for overlapping ownership) leads to declines in employment, real wages, and the labor share. Moreover, if the goal is to foster employment then (i) controlling common ownership and reducing concentration are complements and (ii) government jobs are a substitute for either policy. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership can stimulate the economy when labor market oligopsony power is low relative to product market oligopoly power. We find that neither the monopolistically competitive limit of Dixit and Stiglitz nor the oligopolistic one of Neary (when firms become small relative to the economy) are attained unless there is incomplete portfolio diversification.

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