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  5. Market Power and Inequality: Micro Meets Macro
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Market Power and Inequality: Micro Meets Macro

Paper Session

Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)

Hilton San Francisco Union Square
Hosted By: American Economic Association
  • Chair: Matthew Leisten, Federal Trade Commission

Surplus and Distribution

Matthew Ryan Backus
,
University of California-Berkeley
Jett Pettus
,
Massachusetts Institute of Technology

Abstract

In many policy environments, economists offer advice based on a criterion that maximizes economic surplus. In the absence of additional, policy-specific transfers, this criterion can be represented as a weighted utilitarian social choice rule. We characterize assumptions under which the welfare weights associated with that rule may be recovered using consumer choice data. We go on to estimate a model of multi-product demand for retail milk purchases to recover welfare weights that correspond to maximization of economic surplus in the United States for 2018. Throughout, the emphasis is on transparency concerning the normative content of applied policy analysis.

Markups Across the Income Distribution: Measurement and Implications

Kunal Sangani
,
Stanford University

Abstract

I examine the relationship between customer income and firm markups using rich data on household transactions and wholesale costs. Over the observed purchases, high-income households pay 15pp higher retail markups than low-income households. Half of the markup gap is due to differences in markups paid at the same store. Conditional on income, markups paid by a household also increase when a household shops in high-income areas, shops at retail chains with locations in other high-income areas, or purchases products with a high-income customer base. A model in which household search intensity depends on opportunity cost of time can account for these facts. Consistent with the model’s predictions, I document that retail markups across cities rise with both per-capita income and inequality. Through the lens of the model, changes in the income distribution since 1950 account for a 10–14pp rise in retail markups, with 30 percent of the increase since 1980 due to growing income dispersion. This rise in markups consists of within-firm markup increases as well as a reallocation of sales to high-markup firms, which occurs without any change to the nature of firm production or competition.

Pricing Inequality

Simon Mongey
,
Federal Reserve Bank of Minneapolis
Michael Waugh
,
Federal Reserve Bank of Minneapolis

Abstract

This paper studies household inequality and product market power in general equilibrium. Heterogeneous households face the standard income fluctuations problem and have idiosyncratic preferences over a continuum of goods. Heterogeneous firms produce these varieties and set their price as oligopolistic competitors given the endogenous distribution of demand. We show how households’ savings motives and
incomplete insurance endogenously lead to variation in household-level price elasticities with wealth and income, and that this is consistent with recent empirical evidence. In the stationary equilibrium, firms’ market power varies as households with different price-sensitivities differentially select into high- and low-price varieties by wealth and income. Under standard preferences, high quality firms sell high marginal cost goods at higher prices to richer households, endogenously face less elastic demand, and set
higher markups. Quantitatively, we show that a one-time fiscal transfer to households leads to a medium run decline in TFP due to two effects (i) poor households trade up to higher marginal cost goods, (ii) these goods’ markups increase as poor households’ demand becomes less elastic.

Economic Inequality and Market Power

Matthew Leisten
,
Federal Trade Commission

Abstract

I develop a framework to flexibly and tractably model the joint effects of economic inequality and market power on prices and consumer welfare in a single market. The key is to characterize consumers based on two dimensions: “wealth” and “tastes.” Changes in wealth lead to changes in price sensitivity as consumers’ shadow value for a dollar declines, thereby affecting demand. Tastes affect demand as well, and may be correlated with wealth, but are not causally linked to wealth. I demonstrate the usefulness of the framework with two basic test cases. First, I augment my framework with a set of axioms that implies a measure of inequality-adjusted consumer surplus that diverges from the usual measure employed in industrial organization. Second, I study the causal effect of distributions over wealth on monopoly markups and provide sufficient conditions for increases in inequality to cause markups to increase. Third, future versions of this paper will feature an empirical analysis where I measure the relationship between wealth, price sensitivity, and tastes, and conduct counterfactual simulations to recover the effect of wealth on markups.

Discussant(s)
Devesh Raval
,
Federal Trade Commission
James Brand
,
Microsoft
Gideon Bornstein
,
University of Pennsylvania
Ryan Westphal
,
Brandeis University
JEL Classifications
  • L1 - Market Structure, Firm Strategy, and Market Performance
  • D3 - Distribution