Wednesday, January 31, 2018
Nicole Branger, University of Muenster - Finance Center Muenster, René Marian Flacke, University of Muenster - Finance Center Muenster, and Nikolai Gräber, University of Muenster - Finance Center Muenster identify Monopoly Power in the Oil Market and the Macroeconomy.
ABSTRACT: This paper studies macroeconomic consequences of oil price fluctuations caused by innovations in the monopoly power in the oil market. Monopoly power is interpreted as oil producers' ability to charge markups over marginal costs. We conduct an event study to identify markup shocks based on meetings of the Organization of the Petroleum Exporting Countries (OPEC). A structural vector autoregression shows that markup shocks have unique macroeconomic consequences compared to supply and demand shocks. In particular, real economic activity persistently expands when oil producers' monopoly power rises. We propose a state-of-the-art general equilibrium model that rationalizes these findings.