Endogenous Market Structures and the Business Cycle

Abstract

We characterize endogenous market structures under Bertrand and Cournot competition in a DSGE model. Short run markups vary countercyclically because of the impact of entry on competition. Long run markups are decreasing in the discount factor and in productivity, and increasing in the exit rate and in the entry costs. Dynamic ine¢ ciency can emerge due to excessive entry under Cournot competition. Positive temporary shocks attract entry, which strengthens competition so as to temporary reduce the markups and increase real wages: this competition e¤ect creates an intertemporal substitution e¤ect which boosts consumption and employment. Endogenous market structures improve the ability of a ‡exible prices model in matching impulse response functions and second moments for US data.JEL classi…cation: L11, E32.

Real business cycles with Cournot competition and endogenous entry

“…The aim of this paper is to introduce imperfectly competitive markets characterized by strategic interactions between an endogenous number of …rms in an otherwise standard DSGE model with capital accumulation, with the purpose of evaluating its business cycle properties relative to those of neoclassical models in the RBC tradition. 1 We build on the recent literature on endogenous entry in macroeconomics, in particular on the works by Ghironi and Melitz (2005), Bilbiie et al (2007a,b) and the companion paper Etro and Colciago (2007), 2 and we focus on Cournot competition between …rms producing homogenous goods. Entry in the market requires a sunk investment, which is measured in e¤ective units of labor, and it is determined endogenously in each period to equate the discounted value of pro…ts to the entry cost.…”

Endogenous Firm Entry in an Estimated Model of the U.S. Business Cycle

“…We leave a quantitative evaluation within a sticky-price model for future work. 8 Other studies that consider a supply-side driven competition effect in business cycle models are, for example, Colcagio and Etro (2010) and Etro and Colcagio (2010). In contrast to Jaimovich and Floetotto (2008), however, these studies do not provide a quantitative evaluation of the amplification mechanism.…”

“…A large body of literature finds evidence for countercyclical mark-ups, for example, Bils (1987) and Rotemberg and Woodford (1999), while there is competing evidence of procyclicality, see Nekarda and Ramey (2013). Countercyclical responses of mark-ups to technology shocks and monetary policy shocks have recently been documented by Colcagio and Etro (2010) and Lewis and Poilly (2012). However, mark-ups are not directly unobservable.…”

“…the inability of standard business cycle models to account for the volatility of profits. See, e.g., Lewis and Stevens (2013) or Etro and Colcagio (2010).…”

“…2 The empirical evidence is based on US data. The procyclicality of firm entry is demonstrated by Chatterjee and Cooper (1993), Devereux, Head, and Lapham (1996), or Etro and Colcagio (2010). Davis, Haltiwanger, and Schuh (1998) investigate the role of firm turnover for job flows.…”