Quantifying Market Power and Business Dynamism in the Macroeconomy

Jan De Loecker, Jan Eeckhout and Simon Mongey

No 688, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: What are the causes and consequences of changes in market power and business dynamism in the U.S. economy? We answer these questions in a general equilibrium economy with firm heterogeneity, oligopolistic output markets and endogenous entry. We study three potential causes: technology via (i) the firm productivity distribution and (ii) the composition of overhead versus variable costs, and competition via (iii) the number of potential competitors. We show that in conjunction with time-series on markups and costs, data on business dynamism disentangles these channels. We then estimate that all three channels are necessary to explain these data between 1980 and 2023. Estimated changes in technology and market structure yield positive welfare effects from reallocation and selection of firms, but, quantitatively, these are offset by negative effects from increased market power and overhead. The net effect is a 5% decline in welfare. The changes we identify replicate patterns in declining business dynamism, declining wages and labor force participation, and sales reallocation toward larger, more productive firms.

Keywords: Technological change; Passthrough; business dynamism; Reallocation; Market power in the aggregate economy; Labor share; endogenous markups; Market structure; Wage stagnation (search for similar items in EconPapers)
JEL-codes: C60 D40 D50 L10 (search for similar items in EconPapers)
Date: 2026-09-28
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Related works:
Working Paper: Quantifying Market Power and Business Dynamism in the Macroeconomy (2021)
Working Paper: QUANTIFYING MARKET POWER AND BUSINESS DYNAMISM IN THE MACROECONOMY (2021)
Working Paper: Quantifying Market Power and Business Dynamism in the Macroeconomy (2021)
Working Paper: Quantifying market power and business dynamism in the macroeconomy (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:103823

DOI: 10.21034/sr.688

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