Increase in Turbulence and Market Power

Abstract
During the last four decades, the U.S. industries have experienced heterogeneous increases in market power. This paper argues that this heterogeneity can be explained by different dynamics of turbulence across sectors. To show it, we build a model of a sector where firms differ by their productivity level, and they compete under oligopolistic competition. Business dynamics are captured in the model by sequential idiosyncratic entry, exit, and productivity shocks. A sector-specific increase in turbulence accelerates the turnover of leaders and the mobility of firms over the productivity distribution. This leads to reallocation of market shares towards the most productive firms that charge the lowest price. Their cost leadership allows them to charge the highest markups and gain the steepest profits, driving the increase in sectoral market power. U.S. and European data confirm these predictions. Joint with Agnieszka Markiewicz.