Friday, January 31, 2020

General Equilibrium Oligopoly and Ownership Structure

José Azar, University of Navarra, IESE Business School; CEPR and Xavier Vives, University of Navarra - IESE Business School; Universitat Pompeu Fabra (UPF); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) suggest General Equilibrium Oligopoly and Ownership Structure.

ABSTRACT: We develop a tractable general equilibrium framework in which firms are large, have market power with respect to both products and labor, and in which ownership structure influences firms’ decisions. We characterize the Cournot-Walras equilibrium of an economy where each firm maximizes a shareweighted average of shareholder utilities, which makes the equilibrium independent of price normalization. In a one-sector economy, if returns to scale are non-increasing, then an increase in “effective” market concentration (which accounts for common ownership) leads to declines in employment, real wages, and the labor share. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership could stimulate the economy when the elasticity of labor supply is high relative to the elasticity of substitution in product markets. We characterize for which ownership structures the monopolistically competitive limit or an oligopolistic one are attained as the number of sectors in the economy increases.

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