The Macroeconomics of Market Power

This review surveys the literature on the macroeconomics of market power. Since 1980 various aggregate measures of market power, such as markups, profit rates, and market capitalization, have increased in the United States and around the globe. We find that the rise of markups is due in large part to the reallocation of market shares and to the rise of the inverse expenditure share on variable inputs, whereas output elasticities have not risen. We analyze the macroeconomic causes and consequences of this process and use a model to evaluate the potential mechanisms. Key is the underlying heterogeneity in the distribution of parameters, which passes through to heterogeneity in the distribution of outcomes such as output, the labor share, profits, and welfare. Focusing on aggregate measures of market power is misleading, as the same aggregate markups can be associated with different output and welfare. We conclude with a discussion of how competition policy can be a tool not only for restoring economic efficiency but also for redistribution, depending on how the markups and underlying parameters are distributed.