Increases in Market Power : Implications for the Real Effects of Nominal Shocks

In many countries, market power in goods markets has increased over the last decades. To examine the implications for monetary policy, we present a menu-cost model with endogenous markups. This model rationalizes the observed increases in market power via productivity increases for some firms. Aggregate productivity is procyclical as resources are reallocated across firms over the course of the business cycle. We identify a new amplification mechanism that relies on a direct effect of market concentration on the demand for individual goods. This mechanism strengthens endogenous fluctuations of aggregate productivity as well as monetary non-neutrality and thus helps to understand the flattening of the Phillips curve