Credit Channel and Industrial Firms’ Market Power

Marco Mazzoli

Manchester School, 2002, vol. 70, issue S1, 16-36

Abstract: The model presented here describes an economy where a concentrated industrial sector interacts with a financial system in which industrial firms can choose to finance their investments either by issuing bonds on a competitive spot financial market or by borrowing money from the banking sector, where they enjoy some oligopsonistic power. It is shown that, for a given number of production units, an exogenous modification in the degree of concentration in the industrial sector (caused for example by mergers) affects not only the equilibrium level of investments but also the transmission mechanism of monetary policy with composite effects. In the benchmark case of a perfectly ‘market–oriented’ financial system (i.e. where firms raise their funds on frictionless spot financial markets) mergers and acquisitions tend to reduce the short–run impact of monetary policy because they make the industrial sector less reactive to the changes in marginal financial costs determined by open market operations.

Date: 2002
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