IO in I-O: Size, Industrial Organization, and the Input-Output NetworkMake a Firm Structurally Important

Basile Grassi

No 619, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: Firm-level productivity shocks can help understand sector- and macroeconomic-level outcomes. Capturing the market power of these firms is important: it determines how productivity gains translate into prices and markups. In existing models, firms do not internalize the impact of their systemic size. This paper explores the alternative oligopolistic market structure. To this end, I build a tractablemulti-sector heterogeneous-firmgeneral equilibriummodel featuring oligopolistic competition and an input-output (I-O) network. By affecting price and markup, firm-level productivity shocks propagate both to the downstream and upstream sectors. Sector-level competition intensity affects the strength of these new propagation mechanisms. The structural importance of a firm is determined by the interaction of (i) the sector-level competition intensity, (ii) the firm’s sector position in the I-O network, and (iii) the firm size. In a calibration exercise, the aggregate volatility arising from independent firm-level shock is 34% of the one observed in the data. Keywords: Input-Output Network, Production Network, Shocks Propagation, Oligopoly, Imperfect Competition, IndustrialOrganization, FirmHeterogeneity,RandomGrowth,Granularity, Volatility, Micro-Origin of Aggregate Fluctuations, Business Cycle

Date: 2018
New Economics Papers: this item is included in nep-bec, nep-com, nep-eff and nep-hme
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