Business Cycle Implications of Firm Market Power in Labor and Product Markets

Authors: Sarah Zubairy, Sami Alpanda Date: May 2021

Working paper 2106

In this paper, Sarah Zubairy Sami Alpanda analyze the business cycle implications of firms having oligopsony power in labor markets, as well as oligopoly power in product markets, within the context of a New Keynesian dynamic stochastic general equilibrium model with firm entry and exit. Relative to the standard setup with monopolistic competition in both goods and labor markets, the strategic interaction between intermediate goods firms in the current setup results in larger price markups as well as wage markdowns, while the slopes of the aggregate price and wage Phillips curves become flatter. These effects are strengthened in a strongly non-linear fashion as the number of firms in each sector decline. Oligopsonistic labor markets also render wage shocks expansionary, unlike in the standard setup. Results indicate that a secular increase in industry concentration would not only reduce the labor share of income, but also weaken the pass-through from firms’ marginal costs to prices and from productivity increases to real wages.

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Keywords: Market power, oligopoly, oligopsony, New Keynesian DSGE model, entry-exit