Markup cycles, dynamic misallocation, and amplification

Marcus Opp, Christine A. Parlour and Johan Walden

Journal of Economic Theory, 2014, vol. 154, issue C, 126-161

Abstract: We develop a tractable dynamic general equilibrium model of oligopolistic competition with a continuum of heterogeneous industries. Industries are exposed to aggregate and industry-specific productivity shocks. Firms in each industry set value-maximizing state-contingent markups, taking as given the behavior of all other industries. When consumers are risk-averse, industry markups are countercyclical with regards to the industry-specific component, but may be procyclical with regards to the aggregate shock. The general equilibrium dispersion of markups implied by the optimization of heterogeneous industries creates misallocation of labor across industries. The misallocation, in turn, generates aggregate welfare losses state-by-state that feed back into the industry problem via a representative agent's marginal utility of aggregate consumption. Misallocation dynamics may transmit industry-specific shocks, or amplify small aggregate shocks, and so lead to aggregate fluctuations through these feedback effects.

Keywords: Oligopolistic competition; Markup cycles; Allocative efficiency; Dynamic games; DSGE models (search for similar items in EconPapers)
JEL-codes: E32 L13 L16 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:154:y:2014:i:c:p:126-161

DOI: 10.1016/j.jet.2014.09.001

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