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Market Structure and Monetary Non-Neutrality

Author

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  • Simon Mongey

    (NYU)

Abstract
Canonical macroeconomic models of pricing under nominal rigidities assume markets consist of atomistic firms. Most US retail markets are dominated by a few large firms. To bridge this gap, I extend an equilibrium menu cost model to allow for a continuum of sectors with two large firms in each sector. Compared to a model with monopolistically competitive markets, and calibrated to the same good-level data on price adjustment, the duopoly model generates output responses to monetary shocks that are more than twice as large. Firm-level prices respond equally to idiosyncratic shocks, but less to aggregate shocks in the calibrated duopoly model. Under duopoly, the response of low priced firms to an increase in money is dampened: a falling real price at its competitor weakens both the incentive to increase prices, and price conditional on adjustment. The dynamic duopoly model also implies (i) large first order welfare losses from nominal rigidities, (ii) lower menu costs, (iii) a U-shaped relationship between market concentration and price flexibility, forwhich I find strong evidence in the data, (iv) a source of downward bias in markup estimates attained from inverting a static oligopoly model.

Suggested Citation

  • Simon Mongey, 2017. "Market Structure and Monetary Non-Neutrality," 2017 Meeting Papers 184, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:184
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    4. Germán Gutiérrez & Thomas Philippon, 2017. "Investmentless Growth: An Empirical Investigation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(2 (Fall)), pages 89-190.
    5. Ariel Burstein & Basile Grassi & Vasco Carvalho, 2019. "Bottom-Up Markup Fluctuations," 2019 Meeting Papers 505, Society for Economic Dynamics.
    6. Hong, Gee Hee & Klepacz, Matthew & Pasten, Ernesto & Schoenle, Raphael, 2023. "The real effects of monetary shocks: Evidence from micro pricing moments," Journal of Monetary Economics, Elsevier, vol. 139(C), pages 1-20.
    7. Hassan Afrouzi, 2024. "Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money," Journal of Political Economy, University of Chicago Press, vol. 132(10), pages 3378-3420.
    8. Balleer, Almut & Zorn, Peter, 2019. "Monetary Policy, Price Setting, and Credit Constraints," CEPR Discussion Papers 14163, C.E.P.R. Discussion Papers.
    9. Ueda, Kozo, 2023. "Duopolistic competition and monetary policy," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 70-85.
    10. Stéphane Dupraz, 2024. "A Kinked‐Demand Theory of Price Rigidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 325-363, March.
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    13. S. Boragan Aruoba & Eugene Oue & Felipe Saffie & Jonathan L. Willis, 2023. "Real Rigidities, Firm Dynamics, and Monetary Nonneutrality: The Role of Demand Shocks," FRB Atlanta Working Paper 2023-03, Federal Reserve Bank of Atlanta.
    14. Germán Gutiérrez & Thomas Philippon, 2017. "Declining Competition and Investment in the U.S," NBER Working Papers 23583, National Bureau of Economic Research, Inc.
    15. Mazzoli, Marco & Lombardini, Simone, 2021. "Business cycle in an oligopolistic economy with entry and exit," Journal of Macroeconomics, Elsevier, vol. 69(C).
    16. Greg Kaplan & Piotr Zoch, 2020. "Markups, Labor Market Inequality and the Nature of Work," NBER Working Papers 26800, National Bureau of Economic Research, Inc.
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    19. Aquilante, Tommaso & Chowla, Shiv & Dacic, Nikola & Haldane, Andrew & Masolo, Riccardo & Schneider, Patrick & Seneca, Martin & Tatomir, Srdan, 2019. "Market power and monetary policy," Bank of England working papers 798, Bank of England.

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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