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Turbulence Trends and Market Power

  • Location
    Erasmus University Rotterdam, Campus Woudestein, G3-29
  • Date and time

    September 21, 2022
    13:00 - 14:00

The market power of U.S. firms has risen over the last four decades. At the same time, firms’ turbulence steadily increased. Yet, the magnitude of both trends strongly differs across industries. This paper argues that the heterogeneity in market power dynamics across sectors can be explained by differences in urbulence that alternates firms’ productivity ranks. To show it, we build a model of a sector where firms differ by their productivity level, and they compete under oligopolistic competition. 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.