The consequences of Monopoly Power For Economic Growth

This project studies the welfare consequences of product market power in a dynamic setting of endogenous economic growth through costly productivity improvements by monopolistic firms. In partial equilibrium, we show that (1) social incentives for productivity improvements always exceed the private incentives of a monopolistic firm and (2) the extent to which more or less productive firms underinvest in marginal cost reductions depends on demand primitives. With those insights in mind, we develop a general equilibrium theory with three key ingredients: (1) endogenous innovation by monopolistically competitive firms, (2) markup heterogeneity from non-isoelastic residual demand curves and (3) selection from endogenous entry and exit. In this setting, both the aggregate and cross-firm allocation of production and innovation resources may be inefficient, due to the level and dispersion of markups, respectively.

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