Post on 03-Dec-2021
transcript
yyl
Market structure and monetary non-neutrality
Simon Mongey
Federal Reserve Bank of Minneapolis
ASU Junior Macroeconomics Conference
November 4, 2017
The views expressed herein are those of the authors and not necessarily those of the Federal Reserve
Bank of Minneapolis or the Federal Reserve System.
Simon Mongey, ”Market structure and monetary non-neutrality” p.0/21
Introductionyyl
Monetary economics
- How do changes in nominal spending affect output vs. inflation?
- Nominal rigidity + Firms are ‘small’ in their market (competitive)
Simon Mongey, ”Market structure and monetary non-neutrality” p.1/21
Introductionyyl
Monetary economics
- How do changes in nominal spending affect output vs. inflation?
- Nominal rigidity + Firms are ‘small’ in their market (competitive)
This paper
- Nominal rigidity + Firms are ‘large’ in their market (strategic)
Simon Mongey, ”Market structure and monetary non-neutrality” p.1/21
Introductionyyl
Monetary economics
- How do changes in nominal spending affect output vs. inflation?
- Nominal rigidity + Firms are ‘small’ in their market (competitive)
This paper
- Nominal rigidity + Firms are ‘large’ in their market (strategic)
Important
1. Markets dominated by a few large firms Fig. - Distributions of concentration
e.g. Mayonnaise, Ohio, 2005:Q1 - Hellman’s 45%, Kraft 33% (IRI data)
2. “Increasing concentration” - Philippon Gutierrez ‘17, Autor et al. ‘17, Jan2 ‘17
Simon Mongey, ”Market structure and monetary non-neutrality” p.1/21
Introductionyyl
Monetary economics
- How do changes in nominal spending affect output vs. inflation?
- Nominal rigidity + Firms are ‘small’ in their market (competitive)
This paper
- Nominal rigidity + Firms are ‘large’ in their market (strategic)
Important
1. Markets dominated by a few large firms Fig. - Distributions of concentration
e.g. Mayonnaise, Ohio, 2005:Q1 - Hellman’s 45%, Kraft 33% (IRI data)
2. “Increasing concentration” - Philippon Gutierrez ‘17, Autor et al. ‘17, Jan2 ‘17
Quantitative question
- How does market structure affect transmission of monetary shocks?
Simon Mongey, ”Market structure and monetary non-neutrality” p.1/21
Approachyyl
Quantitative model
- Firm heterogeneity - Idiosyncratic productivity shocks
- Nominal rigidity - Menu cost of changing prices (ξ)
- Exogenous changes in nominal spending - Shocks to money supply
- New - Two ‘large’ firms in each sector. Dynamic oligopoly. Literature
Simon Mongey, ”Market structure and monetary non-neutrality” p.2/21
Approachyyl
Quantitative model
- Firm heterogeneity - Idiosyncratic productivity shocks
- Nominal rigidity - Menu cost of changing prices (ξ)
- Exogenous changes in nominal spending - Shocks to money supply
- New - Two ‘large’ firms in each sector. Dynamic oligopoly. Literature
How does market structure affect transmission of monetary shocks?
- Compare: Oligopoly vs. Monopolistic competition
- Calibrate to match same data on good-level price dynamics
- Frequency of adjustment, Size of adjustment, Average markup
Simon Mongey, ”Market structure and monetary non-neutrality” p.2/21
Approachyyl
Quantitative model
- Firm heterogeneity - Idiosyncratic productivity shocks
- Nominal rigidity - Menu cost of changing prices (ξ)
- Exogenous changes in nominal spending - Shocks to money supply
- New - Two ‘large’ firms in each sector. Dynamic oligopoly. Literature
How does market structure affect transmission of monetary shocks?
- Compare: Oligopoly vs. Monopolistic competition
- Calibrate to match same data on good-level price dynamics
- Frequency of adjustment, Size of adjustment, Average markup
Main finding
- 2.5 times larger output fluctuations under duopoly
Simon Mongey, ”Market structure and monetary non-neutrality” p.2/21
Dynamic complementarityyl
- Consider two firms with initial prices pA > pB
- Equilibrium
- Firm A: Leave price at p′A = pA
- Firm B: Pay ξ and increase price to p′B < pA
- Why?
- Given p′A, complementarity makes a higher p′B profitable
- Given p′B , the menu cost makes a price cut unprofitable for Firm A
- Static complementarity + Frictions → Dynamic complementarity
- A higher pA yields a higher p′B in equilibrium
- A lower pA yields a lower p′B in equilibrium
Simon Mongey, ”Market structure and monetary non-neutrality” p.3/21
Dynamic complementarityyl
- Consider two firms with initial relative prices pAM >
pBM
- Equilibrium
- Firm A: Leave price at p′A
M = pAM
- Firm B: Pay ξ and increase price to p′B
M <pAM
- Why?
- Given p′B
M , complementarity makes a higher p′B
M profitable
- Given p′A
M , the menu cost makes a price cut unprofitable for Firm A
- Static complementarity + Frictions → Dynamic complementarity
- A higher pAM yields a higher p′
B
M in equilibrium
- A lower pAM yields a lower p′
B
M in equilibrium
Simon Mongey, ”Market structure and monetary non-neutrality” p.3/21
Market structure and monetary economicsyyl
Simon Mongey, ”Market structure and monetary non-neutrality” p.4/21
Market structure and monetary economicsyyl
1. Welfare
- Output is 10% higher when menu costs are zero
- 75% due to lower markups, 25% due to lower price dispersion
- Suggests a different focus for welfare analysis
Simon Mongey, ”Market structure and monetary non-neutrality” p.4/21
Market structure and monetary economicsyyl
1. Welfare
- Output is 10% higher when menu costs are zero
- 75% due to lower markups, 25% due to lower price dispersion
- Suggests a different focus for welfare analysis
2. Strategic complementarity (Ball Romer ‘90, Klenow Willis ‘16, Burstein-Hellwig ‘07)
- MC menu cost models with SC can generate large real effects
- But implausible parameter values to match good-level data
- Addresses “serious challenge to Monetary econ.” (Nakamura Steinsson ‘10)
Simon Mongey, ”Market structure and monetary non-neutrality” p.4/21
Market structure and monetary economicsyyl
1. Welfare
- Output is 10% higher when menu costs are zero
- 75% due to lower markups, 25% due to lower price dispersion
- Suggests a different focus for welfare analysis
2. Strategic complementarity (Ball Romer ‘90, Klenow Willis ‘16, Burstein-Hellwig ‘07)
- MC menu cost models with SC can generate large real effects
- But implausible parameter values to match good-level data
- Addresses “serious challenge to Monetary econ.” (Nakamura Steinsson ‘10)
3. Price stickiness
- Lower menu costs needed in the duopoly model
- Across-region Within-product correlations support model (IRI data)
- Better understand heterogeneity in price flexibility
Simon Mongey, ”Market structure and monetary non-neutrality” p.4/21
Outlineyyl
1. Model
2. Simulations
3. Calibration
4. Decompose the effects of monetary shocks
5. Three additional results
Simon Mongey, ”Market structure and monetary non-neutrality” p.5/21
Householdy
Flow utility
U(C ,N) = logC − N
C =
[∫ 1
0C
1−θθ
j dj
] θ1−θ
, θ > 1
Cj =
[
c1j1−η
η + c2j1−η
η
] η1−η
, η > θ
Total nominal expenditure
PC =∫ 1
0
[
p1jc1j + p2jc2j
]
dj ≤ M
Details - Recursive household problem with dynamic budget constraint → Discount factor
Simon Mongey, ”Market structure and monetary non-neutrality” p.6/21
Household - Solutionyyl
Labor supply∣∣∣∣∣
W
P= −
UN (C ,N)
UC (C ,N)↔ W = PC= M
∣∣∣∣∣
Demand
dij =
(
pij
Pj
)−η(
Pj
P
)−θ
C
︸ ︷︷ ︸
Demand dij
(
pij −W
zij
)
︸ ︷︷ ︸
Per-unit profit
where Pj =
[
p1j1−η + p2j
1−η
] 11−η
P =
[∫ 1
0Pj
1−θdj
] 11−θ
Simon Mongey, ”Market structure and monetary non-neutrality” p.7/21
Household problem - Solutionyyl
Markups∣∣∣∣∣µij =
pij
W/zij
∣∣∣∣∣
︸ ︷︷ ︸
Firm
,
∣∣∣∣∣µj =
Pj
W
∣∣∣∣∣
︸ ︷︷ ︸
Sector
,
∣∣∣∣∣µ =
P
W=
1
C
∣∣∣∣∣
︸ ︷︷ ︸
Aggregate
=1
C
Simon Mongey, ”Market structure and monetary non-neutrality” p.7/21
Household problem - Solutionyyl
Markups∣∣∣∣∣µij =
pij
W/zij
∣∣∣∣∣
︸ ︷︷ ︸
Firm
,
∣∣∣∣∣µj =
Pj
W
∣∣∣∣∣
︸ ︷︷ ︸
Sector
,
∣∣∣∣∣µ =
P
W=
1
C
∣∣∣∣∣
︸ ︷︷ ︸
Aggregate
=1
C
Profits
πij
W=
(
µij
µj
)−η(
µj
µ
)−θ1
µ︸ ︷︷ ︸
Demand dij
(
µij − 1
)
︸ ︷︷ ︸
Per-unit profit
where µj =
[
µ1j1−η + µ2j
1−η
] 11−η
µ =
[∫ 1
0µj
1−θdj
] 11−θ
Technical details
Simon Mongey, ”Market structure and monetary non-neutrality” p.7/21
Household problem - Solutionyyl
Markups ∣∣∣∣∣µij =
pij
W/zij
∣∣∣∣∣
︸ ︷︷ ︸
Choice today
,
∣∣∣∣∣µ′ij =
pij
W ′/z ′ij︸ ︷︷ ︸
State tomorrow
Profits
πij
W=
(
µij
µj
)−η(
µj
µ
)−θ1
µ︸ ︷︷ ︸
Demand dij
(
µij − 1
)
︸ ︷︷ ︸
Per-unit profit
where µj =
[
µ1j1−η + µ2j
1−η
] 11−η
µ =
[∫ 1
0µj
1−θdj
] 11−θ
Simon Mongey, ”Market structure and monetary non-neutrality” p.7/21
Firm problemyl
Markov states
- Sector Markups µi , µ−i x = (µi , µ−i )
- Aggregate Distribution λ(x), money growth g X = (λ, g )
Simon Mongey, ”Market structure and monetary non-neutrality” p.8/21
Firm problemyl
Markov states
- Sector Markups µi , µ−i x = (µi , µ−i )
- Aggregate Distribution λ(x), money growth g X = (λ, g )
Equilibrium functions
- Aggregate markup µ(X )
Simon Mongey, ”Market structure and monetary non-neutrality” p.8/21
Firm problemyl
Markov states
- Sector Markups µi , µ−i x = (µi , µ−i )
- Aggregate Distribution λ(x), money growth g X = (λ, g )
Equilibrium functions
- Aggregate markup µ(X )
Timing and Information (Doraszelski Satterthwaite, 2007)
(x ,X ) determined︸ ︷︷ ︸
Public
→ Draw menu cost ξi ∼ U[0, ξ]
︸ ︷︷ ︸
iid + Private
→ Pricing decisions︸ ︷︷ ︸
Simultaneous
Simon Mongey, ”Market structure and monetary non-neutrality” p.8/21
Firm problemyl
Markov states
- Sector Markups µi , µ−i x = (µi , µ−i )
- Aggregate Distribution λ(x), money growth g X = (λ, g )
Equilibrium functions
- Aggregate markup µ(X )
Timing and Information (Doraszelski Satterthwaite, 2007)
(x ,X ) determined︸ ︷︷ ︸
Public
→ Draw menu cost ξi ∼ U[0, ξ]
︸ ︷︷ ︸
iid + Private
→ Pricing decisions︸ ︷︷ ︸
Simultaneous
Competitor’s policies
- Markup conditional on adjustment µ∗−i (x ,X ) ∈ R+
- Markup adjustment γ−i (x ,X , ξ−i ) ∈ {0, 1}
Simon Mongey, ”Market structure and monetary non-neutrality” p.8/21
Firm problemyl
Value
Vi (x ,X , ξi ) = maxγi∈{0,1}
γi
[
Vadji (x ,X )− ξi
]
+ (1− γi )Vstayi (x ,X )
Value of adjusting price
Vadji (x ,X ) = max
µ∗i ∈R+
∫ ξ
0
[
π(
µ∗i ,µ−i (x ,X , ξ−i ),µ(X )
)
+ βE
[
Vi
(x ′,X ′, ξ ′i
) ]]
dF (ξ−i )
µ−i (x ,X , ξ−i ) =
∥∥∥∥∥
γ−i (x ,X , ξ−i )µ∗−i (x ,X )
∥∥∥∥∥
︸ ︷︷ ︸
Competitor adjusts
+
∥∥∥∥∥
(
1− γ−i (x ,X , ξ−i ))
µ−i
∥∥∥∥∥
︸ ︷︷ ︸
Competitor stays
Solution
- Probability of price adjustment Γi (x ,X ) =∫ ξ0 γi (x ,X , ξi )dF (ξi )
- Markup conditional on adjustment µ∗i (x ,X )
Simon Mongey, ”Market structure and monetary non-neutrality” p.9/21
Recursive equilibriumyl
- Symmetric demand, value, adjustment prob. and markup functions
d(x ,X ), V (x ,X ), Γ(x ,X ), µ∗(x ,X )
- Transition density for the distribution of sectors λ′ ∼ H(λ|X )
- Aggregate markup function µ(X )
such that
1. Firm policies and values are Markov-Perfect at the sectoral level
2. W = PC = M + Markup definitions ↔ µ(X ) = 1C (X )
3. Demand functions are consistent with household optimization
4. Transition function for λ is consistent with policies and processes
5. Aggregate mark-up is consistent with (i) mark-up policies, (ii) λ
Details - Computation
Simon Mongey, ”Market structure and monetary non-neutrality” p.10/21
Illustrative simulationyyl
Show
- Micro MPE policies attain high markups in equilibrium
- Macro Weaker intensive and extensive response to ↑ M
Setup
- No aggregate shocks or inflation gt = 0
- Fix paths for menu costs ξit = ξ
- Fix paths for shocks zit → µit
- Plot paths for equilibrium policies(A.) Optimal markup µ∗
it = µ∗ (µit , µ−it )
(B.) Probability of adjustment Γit = Γ (µit , µ−it)
Note: Using estimated parameters (next)
Simon Mongey, ”Market structure and monetary non-neutrality” p.10/21
Monopolistic competitionyl
20 40 60 80
Period t
-0.15
-0.10
-0.05
0
0.05
0.10
0.15
logµit−logµi0
A. Markups
Frictionless markup
Markup µit
Optimal markup µ∗
it
20 40 60 80
Period t
0
0.2
0.4
0.6
0.8B. Probability of adjustment
Markups
- Same optimal markup µ∗L = µ∗
H
—
Adjustment
- Precautionary motive ΓL > ΓH
Profit functions
Simon Mongey, ”Market structure and monetary non-neutrality” p.11/21
Monopolistic competition - ↑ Myl
20 40 60 80
Period t
-0.15
-0.10
-0.05
0
0.05
0.10
0.15
logµit−logµi0
A. Markups
Frictionless markupFrictionless markup
Markup µit
Optimal markup µ∗
it
20 40 60 80
Period t
0
0.2
0.4
0.6
0.8B. Probability of adjustment
Intensive margin
- Optimal price adjustment ∆pL = µ∗L/µL increases by ∆M
Extensive margin
- Increase in ΓL shifts distribution of price changes to price increases
Profit functions
Simon Mongey, ”Market structure and monetary non-neutrality” p.11/21
Duopolyyl
20 40 60 80
Period t
-0.15
-0.10
-0.05
0
0.05
0.10
0.15
logµit−logµi0
A. Markups
Frictionless markup
Markup µit
Optimal markup µ∗
it
20 40 60 80
Period t
0
0.2
0.4
0.6
0.8B. Probability of adjustment
Markups
- Policies support higher sectoral markup
Adjustment
- High ΓL of price increase to incentivize low ΓH of price decrease
Profit functions
Simon Mongey, ”Market structure and monetary non-neutrality” p.12/21
Duopoly - ↑ Myl
20 40 60 80
Period t
-0.15
-0.10
-0.05
0
0.05
0.10
0.15
logµit−logµi0
A. Markups
Frictionless markup
Markup µit
Optimal markup µ∗
it
20 40 60 80
Period t
0
0.2
0.4
0.6
0.8B. Probability of adjustment
Intensive margin
- Falling µH reduces µ∗L
Extensive margin
- Falling µH reduces ΓL
Profit functions
Simon Mongey, ”Market structure and monetary non-neutrality” p.12/21
Duopoly - ↑ Myl
20 40 60 80
Period t
-0.15
-0.10
-0.05
0
0.05
0.10
0.15
logµit−logµi0
A. Markups
Frictionless markup
Markup µit
Optimal markup µ∗
it
20 40 60 80
Period t
0
0.2
0.4
0.6
0.8B. Probability of adjustment
Intensive margin
- Optimal adjustment ∆pL = µ∗L/µL increases by less than ∆M
Extensive margin
- Dampened increase in ΓL
Profit functions Two low prices
Simon Mongey, ”Market structure and monetary non-neutrality” p.12/21
Quantification - What features imply large output effects?yl
Static complementarity
- More substitutable within sectors η, less across sectors θ
Dynamic complementarity
- Which features help firms to track each other’s prices in the MPE?
- Larger menu costs ξ
- Smaller idiosyncratic shocks σz
- State-dependent (menu cost), rather than Calvo
- Lower trend money growth g?
- Lower volatility of money growth σg?
Simon Mongey, ”Market structure and monetary non-neutrality” p.13/21
Quantification - Calibration strategy (monthly)yl
External
- Money growth parameters ρg = 0.6, σg = 0.002, g = 1.0251/12
- Cross-sector demand elasticity θ = 1.5
Internal
- Menu cost ξ, Size of shocks σz
- Within-sector demand elasticity η
Moments
- Average absolute size of regular price changes (IRI) - 10%
- Average frequency of regular price changes (IRI) - 13%
- Average markup E [µit ] = 1.30
Robustness to η in MC model Data details Identification argument for σz , ξ, η Firm vs Sector shocks
Simon Mongey, ”Market structure and monetary non-neutrality” p.14/21
Quantification - Parameters and resultsyyl
Duopoly MC
A. ParameterCross-sector demand elasticity θ 1.5 1.5Within-sector demand elasticity η 10.5 4.5Size of menu cost ξ 0.17 0.21Size of idiosyncratic shocks (%) σz 3.80 4.00
B. Moments matchedAverage markup E [µit ] 1.30 1.30Frequency of price change 0.13 0.13Ave. absolute size of price change 0.10 0.10
C. ResultsStd. deviation consumption std [log Ct ]× 100 0.31 0.13Average minus Frictionless markup E [µit ]− µf 0.10 0.02
Simon Mongey, ”Market structure and monetary non-neutrality” p.15/21
Quantification - Parameters and resultsyyl
Duopoly MC
A. ParameterCross-sector demand elasticity θ 1.5 1.5Within-sector demand elasticity η 10.5 4.5Size of menu cost ξ 0.17 0.21Size of idiosyncratic shocks (%) σz 3.80 4.00
B. Moments matchedAverage markup E [µit ] 1.30 1.30Frequency of price change 0.13 0.13Ave. absolute size of price change 0.10 0.10
C. ResultsStd. deviation consumption std [log Ct ]× 100 0.31 0.13Average minus Frictionless markup E [µit ]− µf 0.10 0.02
∗ 2.5 times larger output fluctuations (Data: US 1969-2016, std [logCt ]× 100 = 1.01)
Simon Mongey, ”Market structure and monetary non-neutrality” p.15/21
Quantification - Parameters and resultsyyl
Duopoly MC
A. ParameterCross-sector demand elasticity θ 1.5 1.5Within-sector demand elasticity η 10.5 4.5Size of menu cost ξ 0.17 0.21Size of idiosyncratic shocks (%) σz 3.80 4.00
B. Moments matchedAverage markup E [µit ] 1.30 1.30Frequency of price change 0.13 0.13Ave. absolute size of price change 0.10 0.10
C. ResultsStd. deviation consumption std [log Ct ]× 100 0.31 0.13Average minus Frictionless markup E [µit ]− µf 0.10 0.02
∗ 2.5 times larger output fluctuations (Data: US 1969-2016, std [logCt ]× 100 = 1.01)
1. 10 ppt larger markups than frictionless economy → ≈ 10% Lower output
Simon Mongey, ”Market structure and monetary non-neutrality” p.15/21
Quantification - Parameters and resultsyyl
Duopoly MC
A. ParameterCross-sector demand elasticity θ 1.5 1.5Within-sector demand elasticity η 10.5 4.5Size of menu cost ξ 0.17 0.21Size of idiosyncratic shocks (%) σz 3.80 4.00
B. Moments matchedAverage markup E [µit ] 1.30 1.30Frequency of price change 0.13 0.13Ave. absolute size of price change 0.10 0.10
C. ResultsStd. deviation consumption std [log Ct ]× 100 0.31 0.13Average minus Frictionless markup E [µit ]− µf 0.10 0.02
∗ 2.5 times larger output fluctuations (Data: US 1969-2016, std [logCt ]× 100 = 1.01)
1. 10 ppt larger markups than frictionless economy → ≈ 10% Lower output
2. Smaller shocks deliver observed size of price change
Simon Mongey, ”Market structure and monetary non-neutrality” p.15/21
Quantification - Parameters and resultsyyl
Duopoly MC
A. ParameterCross-sector demand elasticity θ 1.5 1.5Within-sector demand elasticity η 10.5 4.5Size of menu cost ξ 0.17 0.21Size of idiosyncratic shocks (%) σz 3.80 4.00
B. Moments matchedAverage markup E [µit ] 1.30 1.30Frequency of price change 0.13 0.13Ave. absolute size of price change 0.10 0.10
C. ResultsStd. deviation consumption std [log Ct ]× 100 0.31 0.13Average minus Frictionless markup E [µit ]− µf 0.10 0.02
∗ 2.5 times larger output fluctuations (Data: US 1969-2016, std [logCt ]× 100 = 1.01)
1. 10 ppt larger markups than frictionless economy → ≈ 10% Lower output
2. Smaller shocks deliver observed size of price change
3. 25 percent smaller menu costs deliver same frequency of price change
Figure - (i) ξ comp. stats., (ii) IRF of Ct Table - Alternative calibrations Figure - Comp. stats η
Simon Mongey, ”Market structure and monetary non-neutrality” p.15/21
Quantification - Parameters and resultsyyl
Duopoly MC MC′
A. ParameterCross-sector demand elasticity θ 1.5 1.5 1.5Within-sector demand elasticity η 10.5 4.5 ↑ 10.5Size of menu cost ξ 0.17 0.21 ↓ 0.17Size of idiosyncratic shocks (%) σz 3.80 4.00 ↓ 3.80
B. Moments matchedAverage markup E [µit ] 1.30 1.30 ↓ 1.12Frequency of price change 0.13 0.13 ↑ 0.19Ave. absolute size of price change 0.10 0.10 ↓ 0.05
C. ResultsStd. deviation consumption std [logCt ]× 100 0.31 0.13 ⇓ 0.06Average minus Frictionless markup E [µit ]− µf 0.10 0.02 ↓ 0.01
∗ 2.5 times larger output fluctuations (Data: US 1969-2016, std [logCt ]× 100 = 1.01)
1. 10 ppt larger markups than frictionless economy → ≈ 10% Lower output
2. Same size shocks deliver observed size of price change
3. 25 percent smaller menu costs deliver same frequency of price change
Figure - (i) ξ comp. stats., (ii) IRF of Ct Table - Alternative calibrations Figure - Comp. stats η
Simon Mongey, ”Market structure and monetary non-neutrality” p.15/21
Pricing frictions and firm valueyl
✓ More frictions → Higher markups
✗ More frictions → Markups further away from µ∗it
- Rationalizes why firms may want to create pricing frictions- Sep 24: Apple announces price of $999 for new iPhone on sale Nov 3
- Annual IKEA catalogue
Simon Mongey, ”Market structure and monetary non-neutrality” p.16/21
Accounting for inflationyyl
Questions
1. Lower price response due to smaller extensive or intensive margin?
2. Which sectors (µ1j , µ2j ) dampen each margin the most?
Decomposition a la Caballero-Engel (2007)
- One-time unforeseen ∆Mt > 0
πt ≈N
∑i=1
ωi
[∣∣∣Γit
(
xit − xit
)∣∣∣
︸ ︷︷ ︸
1. Intensive
+∣∣∣xit
(
Γit − Γit
)∣∣∣
︸ ︷︷ ︸
2. Extensive
+∣∣∣
(
Γit − Γit
)(
xit − xit
)∣∣∣
︸ ︷︷ ︸
3. Covariance
]
where xit = log p∗it − log pit−1, is the desired price change
Simon Mongey, ”Market structure and monetary non-neutrality” p.17/21
Accounting for inflationyyl
πt ≈N
∑i=1
ωi
[∣∣∣Γit
(
xit − xit
)∣∣∣
︸ ︷︷ ︸
1. Intensive
+∣∣∣xit
(
Γit − Γit
)∣∣∣
︸ ︷︷ ︸
2. Extensive
+∣∣∣
(
Γit − γit
)(
xit − xit
)∣∣∣
︸ ︷︷ ︸
3. Covariance
]
Intensive Extensive% %
Fraction of the difference: πMont − πDuo
t 36 45
Fraction of each margin by (µ1j ,µ2j )
Low-High / High-Low 142 122High-High 21 32Low-Low -63 -54
Result
- Extensive and intensive margin components dampened ≈ equally
- Low markup sectors become more flexible
Simon Mongey, ”Market structure and monetary non-neutrality” p.18/21
Relation to some of the literatureyyl
The duopoly mechanism does not deliver amplification through
- More kurtosis in dist. of price changes (Alvarez Bihan Lippi, 2016) +
- Excess curvature in demand as under Kimball (Klenow Willis, 2016) +
... but does depend on firm’s ability to choose when to change prices
- Dynamic complementarities weaker under Calvo +
... and is qualitatively consistent with previous empirical work
- Strategic complementarities in pricing (Gopinath Itskhoki, 2010)
- Counter-cyclical µ’s and conc. (Barro Tenreyo, ‘06; Rotemburg Woodford, ‘91)
- Prices stickier for differentiated (final) goods (Bils Klenow, 2004)
Simon Mongey, ”Market structure and monetary non-neutrality” p.19/21
Additional resultsyyl
1. Large output losses; menu costs lead to higher markups
Results
2. Strategic complementarities in the literature
Results
3. Empirical relationship between concentration and flexibility
Results
Simon Mongey, ”Market structure and monetary non-neutrality” p.20/21
Conclusionyyl
Market structure quantitatively important for understanding
- Aggregate price flexibility following nominal spending shocks
- Firm level price flexibility following idiosyncratic shocks
- Cross-sectional heterogeneity in price flexibility
Market structure empirically important- Increasing concentration and falling labor share
Autor, Dorn, Katz, Patterson, Van Reenen (2016)
- Increasing concentration and weakening Tobin’s Q ↔ InvestmentPhilippon Gutierrez (2016)
This paper presents a framework for assessing these issues
- Relabel pit → kit delivers an oligopolistic Khan-Thomas model
- Exchange rate shocks
- Oligopsony in labor markets
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
yl
THANK YOU!
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Household - Solutionyyl
Preferences - ↓ zij , ↑ Cost, ↑ Demand
C =
[∫ 1
0C
1−θθ
j dj
] θ1−θ
, Cj =
(c1j
z1j
) 1−ηη
+
(c2j
z2j
) 1−ηη
η1−η
Demand
dij = z1−ηij
(
pij
Pj
)−η(
Pj
P
)−θ
C
︸ ︷︷ ︸
Demand dij
(
pij −W
zij
)
︸ ︷︷ ︸
Per-unit profit
where Pj =
[(
z1jp1j
)1−η+(
z2jp2j
)1−η] 1
1−η
P =
[∫ 1
0Pj
1−θdj
] 11−θ
Back - Household solution
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
1. Output loss due to nominal rigidityyyl
Y =1
µ, µ =
[∫ 1
0µj
1−θdj
] 11−θ
, µj =
[
µ1j1−η + µ2j
1−η
] 11−η
Mon. Comp. Duopoly
(1) Output 0.76 0.75(2) ... under no dispersion µij = E[µij ] 0.77 0.77(3) ... with no menu costs µij = µf 0.78 0.83
(3)-(1) Output loss due to nominal rigidity 2.4% 9.7%
Result
- Nearly 10% output losses due to nominal rigidity in oligopoly
- 1st order - 75% due to higher markups
- 2nd order - 25% due to price dispersion
Back - Additional results
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
2. Strategic complementarities in MC modelsyyl
Strategic complementarities
“Substantial nominal rigidity can arise from a combination of strategic
complementarities and nominal frictions” - Ball Romer (1990)
Klenow Willis (2016), Burstein Hellwig (2007)
“Recent work has cast doubt on SC as a source of amplification in menu cost models,
by showing that introducing SC’s can make it difficult match size, freq. for plausible
values of ξ and σz ...this challenge is a serious one” - Nakamura Steinsson (2010)
This paper
- Smaller ξ and σz under duopoly
- Larger ↑ std [ct ] due to strategic complementarity
- How? Complementarity due to µ1jt/µ2jt , not µit/µt
Back - Additional results
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Market concentration and price flexibilityyl
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Market concentration and price flexibilityyl
1. Oligopoly
- Lower menu cost in duopoly model
- Prices change less when firms behave strategically
- Here 1 firm = Non-strategic, 2 firms = Strategic, ∞ firms = Non-strategic
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Market concentration and price flexibilityyl
1. Oligopoly
- Lower menu cost in duopoly model
- Prices change less when firms behave strategically
- Here 1 firm = Non-strategic, 2 firms = Strategic, ∞ firms = Non-strategic
2. Elasticity
- More competition → More elastic demand → More price changes
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Market concentration and price flexibilityyl
1. Oligopoly
- Lower menu cost in duopoly model
- Prices change less when firms behave strategically
- Here 1 firm = Non-strategic, 2 firms = Strategic, ∞ firms = Non-strategic
2. Elasticity
- More competition → More elastic demand → More price changes
Examine correlation structure of IRI data
- U-shaped r’ship between freq of price change and concentration
- Hump-shaped r’ship between size of price change and concentration
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Heterogeneity in market concentrationyyl
1
2
3
4
5
Effe
ctiv
e nu
mbe
r of
firm
s
2001 2003 2005 2007 2009 2011
MS AL MD NJ
A. Across−state Within−Mayonnaise
1
2
3
4
5
2001 2003 2005 2007 2009 2011
Mustketc Peanbutr Cigets Mayo
B. Across−product Within−New Jersey
- Effective number of firms = Inverse Herfindahl Index
✓ Variation across states, within product categories
✓ Variation across product categories, within states
See: Bronnenburg Dhar Dube (JPE ‘09), Bronnenburg Dube Gentzkow (AER ‘12)
Robust - Revenue share of top firm Fig. Cross/within region variation in (i) frequency, (ii) size of price changes
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Regressionyl
Across-state w/in product Across-product w/in stateSize (%) Frequency Size (%) Frequency
Eff. number of firms 0.244*** -0.912*** 0.201*** -0.900***(0.037) (0.161) (0.043) (0.181)
Eff. number of firms2 -0.048*** 0.171*** -0.038*** 0.228***(0.010) (0.043) (0.012) (0.072)
Observations 32,016 32,016 32,016 32,016R-squared 0.100 0.106 0.036 0.031Revpst control ✓ ✓ ✓ ✓
- Standard errors clustered at State × Product level
Result
- Hump-shaped profiles of price flexibility by market concentration
- Robust to either specification
Estimating equations Unweighted Number of goods weighted No rev. control Revenue share
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Average predicted values: Across-state w/in productyl
0.08
0.10
0.12
0.14
0.16
0.18
0.20
1 2 3 4 5 6 7 8 9 10 11 12Effective number of firms
A. Frequency of price change
0.09
0.10
0.11
0.12
1 2 3 4 5 6 7 8 9 10 11 12Effective number of firms
B. Size of price change
Note Solid lines plot the revenue weighted mean of predicted (A.) frequency (B) size of price change from across-state within-product
regression. Means are computed within Effective number of firms bins of width one. Dashed lines give 25th/75th percentiles.
Model has a causal interpretation of correlations in the data
- Oligopoly forces strong at a small handful of firms, then weaken
- Market structure important for understanding price flexibility
Back - Additional results
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Endogenous entryyl
Resolve two issues
- Data Many small firms with high turnover- Theory Threat of entry may affect pricing: ↑ M , ↑ π
- Kokovin Parenti Thisee Zhelobodko (2015)
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Endogenous entryyl
Resolve two issues
- Data Many small firms with high turnover- Theory Threat of entry may affect pricing: ↑ M , ↑ π
- Kokovin Parenti Thisee Zhelobodko (2015)
1. Preferences
C =
[
γ1η
[
(z1c1)η−1
η + (z2c2)η−1
η
]
+ (1− γ)1η Cf
η−1η
] ηη−1
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Endogenous entryyl
Resolve two issues
- Data Many small firms with high turnover- Theory Threat of entry may affect pricing: ↑ M , ↑ π
- Kokovin Parenti Thisee Zhelobodko (2015)
1. Preferences
C =
[
γ1η
[
(z1c1)η−1
η + (z2c2)η−1
η
]
+ (1− γ)1η Cf
η−1η
] ηη−1
2. Endogenous measure δ of atomistic, one-period firms k ∈ [0, δ]
Cf =
[∫ δ
0cfk
ρ−1ρ dk
] ρρ−1
, p∗fk =ρ
ρ − 1M , Pf = δ
− 1ρ−1
ρ
ρ − 1M
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Endogenous entryyl
Resolve two issues
- Data Many small firms with high turnover- Theory Threat of entry may affect pricing: ↑ M , ↑ π
- Kokovin Parenti Thisee Zhelobodko (2015)
1. Preferences
C =
[
γ1η
[
(z1c1)η−1
η + (z2c2)η−1
η
]
+ (1− γ)1η Cf
η−1η
] ηη−1
2. Endogenous measure δ of atomistic, one-period firms k ∈ [0, δ]
Cf =
[∫ δ
0cfk
ρ−1ρ dk
] ρρ−1
, p∗fk =ρ
ρ − 1M , Pf = δ
− 1ρ−1
ρ
ρ − 1M
3. Free-entry determines size of fringe πf(
p1, p2, z1, z2,M , δ)
− φ = 0
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Exchange-rate pass-throughyl
Question in trade literature
- Question Euro devalues 10c , BMW reduces US prices by 2.5c?
- Answer BMW competes with Ford, Ford unaffected by shock
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Exchange-rate pass-throughyl
Question in trade literature
- Question Euro devalues 10c , BMW reduces US prices by 2.5c?
- Answer BMW competes with Ford, Ford unaffected by shock
- Literature 1 Static oligopoly + Flexible prices + CES- Atkeson-Burstein, Pennings
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Exchange-rate pass-throughyl
Question in trade literature
- Question Euro devalues 10c , BMW reduces US prices by 2.5c?
- Answer BMW competes with Ford, Ford unaffected by shock
- Literature 1 Static oligopoly + Flexible prices + CES- Atkeson-Burstein, Pennings
- Literature 2 Dynamic mono. comp. + Nominal rigidities + Kimball- Itskhoki-Gopinath, Itskhoki-Mukhin, Berger-Vavra
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Exchange-rate pass-throughyl
Question in trade literature
- Question Euro devalues 10c , BMW reduces US prices by 2.5c?
- Answer BMW competes with Ford, Ford unaffected by shock
- Literature 1 Static oligopoly + Flexible prices + CES- Atkeson-Burstein, Pennings
- Literature 2 Dynamic mono. comp. + Nominal rigidities + Kimball- Itskhoki-Gopinath, Itskhoki-Mukhin, Berger-Vavra
1. Preferences
C =[
ωh
1σ (zhch)
σ−1σ + (1− ωh)
1σ (zf cf )
σ−1σ
] σσ−1
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Extension - Exchange-rate pass-throughyl
Question in trade literature
- Question Euro devalues 10c , BMW reduces US prices by 2.5c?
- Answer BMW competes with Ford, Ford unaffected by shock
- Literature 1 Static oligopoly + Flexible prices + CES- Atkeson-Burstein, Pennings
- Literature 2 Dynamic mono. comp. + Nominal rigidities + Kimball- Itskhoki-Gopinath, Itskhoki-Mukhin, Berger-Vavra
1. Preferences
C =[
ωh
1σ (zhch)
σ−1σ + (1− ωh)
1σ (zf cf )
σ−1σ
] σσ−1
2. Marginal cost
mci =W 1−αi (W ∗)αi
z+ E = log
(W
W ∗
)
→ mci =W
exp (αiE )
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Data - Markets are highly concentratedyyl
- Market 31 IRI product cat. (p) × 46 states (s) × 132 months (t)
- Firm First 6 digits of barcode (within a product category)
- Example In the market for Mayonnaise in Ohio, 2005:Q1, of 14 firms,Hellmann’s had a 45% revenue share
- Example Herfindahl index of 0.43, Inverse herfindahl index of 2.3
0.00
0.05
0.10
0.15
0.20
Fra
ctio
n of
mar
kets
0 20 40 60 80 100Median = 41
A. Number of firms
0.00
0.05
0.10
0.15
0.20
1 2 3 4 5 6 7 8 9 10Median = 3.70
B. Effective number of firms
0.00
0.05
0.10
0.15
0.20
0.0 0.2 0.4 0.6 0.8 1.0Median = 0.66
B. Two firm revenue share
Back - Introduction Comparison to 6 digit NAICS
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Market structure and monetary non-neutralityyl
Results
- Consumption fluctuations are 2.5 times as large
- Cumulative response of output is 2.4 times as large
Back - Calibration
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Literatureyyl
1. Monopolistic competition, menu-costsMonetary Golosov Lucas (2007), Nakamura Steinsson (2010), Midrigan (2011), Vavra (2014)
Alvarez et al. (2016 ×5), Klenow Willis (2016), Burstein Hellwig (2007)
Inter’l Itskhoki Gopinath (2010), Itskhoki Mukhin (2016), Berger Vavra (2016)
New - Dynamic oligopoly
2. Oligopoly, flexible pricesTrade Atkeson Burstein (2008), Edmond Midrigan Xu (2015), Pennings (2015)
IO Hottman Redding Weinstein (2016)
New - Nominal rigidity
3. Dynamic oligopoly, nominal rigidityMaskin-Tirole ‘88, Jun Vives ‘04, Einav Somaini ‘13, Nakamura Zerom ‘10, Neiman ‘11
New - Equilibrium macroeconomic model
Back - Approach
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Householdy
W(S ,B) = max{cij},N,{B(S ′)}
logC −N + βE
[
W(S ′,B(S ′)
) ]
where C =
[∫ 1
0C
θ−1θ
j dj
] 1−θθ
, θ > 1
Cj =
[
c1j1−η
η + c2j1−η
η
] ηη−1
, η > θ
subject to a nominal budget constraint
∫ 1
0
[
p1jc1j + p2jc2j
]
dj
︸ ︷︷ ︸
=M(S)
+∑S ′
Q(S , S ′)B(S ′) ≤ B(S) +W (S)N + Π(S)
Back - Household preferences
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Menu cost comparative staticsyl
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Calibration - Identificationyyl
Increasing ξ
- Costly to adjust. Adjust less often. Widen bounds.
- ↑ Size, ↓ Frequency
Increasing σz
(i) Given bounds. Hit bounds more often. ↑ Frequency
(ii) Hit bounds more often → Widen bounds ↑ Size
Increasing η
- Increase average markup
Back - Calibration strategy
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Menu cost comparative staticsyl
0.15 0.2 0.25 0.3 0.350.05
0.1
0.15
0.2
0.25A. High µ - Frequency
0.15 0.2 0.25 0.3 0.350.05
0.1
0.15
0.2
0.25B. Low µ - Frequency
0.15 0.2 0.25 0.3 0.35Menu cost ξ
-0.12
-0.1
-0.08
-0.06C. High µ - Size
DuopolyMonopolistic competition
0.15 0.2 0.25 0.3 0.35Menu cost ξ
0.06
0.08
0.1
0.12D. Low µ - Size
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Benchmarking models - Robustnessyl
(A) For each η, choose ξ and σz to match the data.
(B) Lower ↓ η → Profits less sensitive to prices → Require lower ↓ ξ
(C) Can match E [µit ] = 1.30 from duopoly model with η∗ = 4.5
(D) Result When ξ and σz are recalibrated σ(Ct) is unaffectedBack - Calibration strategy
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Recursive equilibrium - Computationyl
Krussel-Smith
- Conjecture price function for µ(S)
log µ(S)− log µ = αg (log g(S)− log g) + αµ (log µ(S−1)− log µ)
- Reduces aggregate state to S = (µ−1, g)
MPE policy functions
- Approximate expected value function V e (µ1, µ2, µ,g)
V e (µ1,µ2, µ,g) =∫
V
(µ1
e ε′1+g ′(g ,ε′g ),
µ2
e ε′2+g ′(g ,ε′g ),µ,g ′(g , ε′g )
)
dF (ε′1, ε′2, ε′g )
- Cubic splines in µ1, µ2. Linear splines in µ, g
- Guess initial pricing policies µ(0)′−i (µi , µ−i ,S) and γ
(0)′−i (µi , µ−i ,S)
- Given competitor policies, use collocation algorithm to solve for value functions
- Determines new µ(1)′−i (µi ,µ−i ) and γ
(1)′−i (µi ,µ−i )
- Continue, until µ(k+1)′−i = µ
(k)′−i and γ
(k+1)′−i = γ
(k)′−i
Back - Recursive equilibrium
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Profit function propertiesyl
1 1.1 1.2 1.3 1.40
0.05
0.1
A. Profit function π(µ1,µ2)
µ2 = 1.3µ2 = 1.2µ2 = 1.1
1 1.1 1.2 1.3 1.4
Mark-up µ1
1
1.2
1.4B. Static best response µ∗
2(µ1)
η = 14η = 10.5η = 6
1 1.1 1.2 1.3 1.4
Mark-up µ1
-40
-20
0
20C. Second derivative π11(µ1,µ2)
µ2 = 1.3µ2 = 1.2µ2 = 1.1
1 1.1 1.2 1.3 1.4
Mark-up µ1
-5
0
5
10D. Cross-partial derivative π12(µ1,µ2)
µ2 = 1.3µ2 = 1.2µ2 = 1.1
- Panel B - Best response slope between 0 and 1- More elastic demand ↑ η → (i) ↓ µ∗, (ii) ↑ slope
Back - Strategic complementarities
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Calibration and resultsyyl
Duopoly Monopolistic
Base
A. Parameter
Within-sector elasticity of demand η 10.5 4.5Upper bound of menu cost distribution ξ ∼ U[0, ξ] 0.17 0.21Size of shocks (percent) σz 3.8 4.0
B. Moments
Markup E [µit ] 1.30 1.30Frequency of price change E [1{pit 6= pit−1}] 0.13 0.13Log absolute price change, cond. on price change E [| log(pit/pit−1)|] 0.10 0.10
C. Results
Std. deviation consumption (percent) σ (logCt) 0.31 0.13Average markup minus frictionless markup E [µit ]− µ∗ 0.10 0.02
I Parameters same as estimated duopoly model
II Same ηm = ηd re-calibrated ξm , σz,m
III Both models have flexible price markup of 1.20
Back - CalibrationSimon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Robustness to target E [µit ]yl
Back - Calibration
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Profit function propertiesyl
1 1.1 1.2 1.3 1.40
0.05
0.1
A. Profit function π(µ1,µ2)
µ2 = 1.3µ2 = 1.2µ2 = 1.1
1 1.1 1.2 1.3 1.4
Mark-up µ1
1
1.2
1.4B. Static best response µ∗
2(µ1)
η = 14η = 10.5η = 6
1 1.1 1.2 1.3 1.4
Mark-up µ1
-40
-20
0
20C. Second derivative π11(µ1,µ2)
µ2 = 1.3µ2 = 1.2µ2 = 1.1
1 1.1 1.2 1.3 1.4
Mark-up µ1
-5
0
5
10D. Cross-partial derivative π12(µ1,µ2)
µ2 = 1.3µ2 = 1.2µ2 = 1.1
- Strategic complementarity driven by π12 > 0
- Weird property of CES demand functions - Panel D- As markups increase, π12 falls, then becomes negative
Back - Markups ad Values
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Duopoly - ↑ Myl
Intensive margin
- Optimal adjustment ∆pL = µ∗L/µL increases by more than ∆M
Extensive margin
- Larger increase in γH relative to similar MC firm
Back - Duopoly simulation
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Decomposing revenue changes at large firmsyl
0.0
0.5
1.0
1.5
2.0
Firm
sha
re in
mar
ket (
1)
0.0 0.5 1.0 1.5 2.0Market share in State (2)
0.0
0.5
1.0
1.5
2.0
Firm
sha
re in
mar
ket (
1)
0.0 0.5 1.0 1.5 2.0State expenditure (3)
For each state s, product category p, decompose time-series variance in ∆ log ripst
var (∆log ripst ) = var
(
∆log
(ripst
rpst
))
︸ ︷︷ ︸
(1) Firm share in market
+ var
(
∆log
(rpst
rst
))
︸ ︷︷ ︸
(2) Market share in state
+ var (∆log rst )
︸ ︷︷ ︸
(3) State expenditure
+Covariances
Back - Calibration strategy
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Relation to Kimball-style strategic complementarity yl
- Duopoly demand function super-elasticity ε ∈ [0.3, 0.7]
- Literature Klenow Willis - ε = 10, Gopinath Itskhoki - ε = 4
Back - Additional results Back - Example µ policies
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Empirical - Data detailsyl
- IRI data
- An observation is at the UPC × Category × Store level
- Stores: 2,000, Years: 2001-2012, Categories: 31
- e.g. Mayonnaise, 2001. Firms: 72, UPCs: 402
- Observations removed
- Absolute size of price change greater than 99th percentile
- Data missing at t − 1
- Regular price changes
- Price change set to zero ∆ log pict = 0
- Possible measurement error: ∆| log pict | < 0.001
- Promotional flag Promoict = 1
- Items coming off promotion Promoict−1 = 1 & Promoict = 0
- Statistics
- All statistics computed monthly for each product category c
- Data is weekly, statistics reported monthly using week three of each month
- e.g. Frequency freqct is fraction of c goods changing price at t
freqct = ∑i∈c
1 [d log pict 6= 0] /Nct
Back - Empirical - Size of price changes Back - Regression specification Back - Calibration
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Comparison to Census Manufacturingyyl
- Data National NAICS 6-digit revenue share of 4 largest firms
✓ Few industries are national, e.g. Manufacturing
✗ Most industries are local, e.g. Health care
0.00
0.05
0.10
0.15
0.20
Fra
ctio
n
0.0 0.2 0.4 0.6 0.8 1.0Revenue share of top 4 firms
A. Manufacturing
0.00
0.10
0.20
0.30
0.40
0.50
0.0 0.2 0.4 0.6 0.8 1.0Revenue share of top 4 firms
B. Health care / Social assistance
Source: 2007 Economic Census, 6−digit NAICS classification, national level
Back - Inverse herfindahl
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Empirical - Distribution of price changesyl
0.00
0.02
0.04
0.06
0.08
0.10
Fra
ctio
n
−0.20 −0.15 −0.10 −0.05 0.00 0.05 0.10 0.15 0.20Log price change
Regular price changesAll price changes
− Regular price changes: Mean = .0396, Std dev. = .087, Skew = 1.673, Kurtosis = 11.149− All price changes: Mean = .0005, Std. dev. = .256, Skew = −.108, Kurtosis = 3.418
Regular price changes (Mayonnaise, 2005)
Back - Empirical - Size of price changes
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Variation in market concentration - Share top firmyyl
.3
.4
.5
.6
.7
.8
Rev
enue
sha
re o
f lar
gest
firm
2001 2003 2005 2007 2009 2011
MS AL MD NJ
A. Across−state Within−Mayonnaise
.3
.4
.5
.6
.7
.8
2001 2003 2005 2007 2009 2011
Mustketc Peanbutr Cigets Mayo
B. Across−product Within−New Jersey
✗ Little time-series variation
✓ Variation across states, within product categories
✓ Variation across product categories, within states
Back - Variation in concentration
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
3. Variation in price flexibilityyyl
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0.05
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Fra
ctio
n of
mar
kets
0.00 0.10 0.20 0.30 0.40Freq_pst
1A. Frequency of price change
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0 20 40 60 80 100100 x |Freq_pst−Freq_pt|/Freq_pt
1B. Variation across−s within−pt
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0 20 40 60 80 100100 x |Freq_pst−Freq_st|/Freq_st
1C. Variation across−p within−st
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Fra
ctio
n of
mar
kets
0.00 0.05 0.10 0.15 0.20 0.25Size_pst
2A. Average abs. size of price change
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0 20 40 60 80 100100 x |Size_pst−Size_pt|/Size_pt
2B. Variation across−s within−pt
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0 20 40 60 80 100100 x |Size_pst−Size_st|/Size_st
2C. Variation across−p within−st
Back - Variation in concentration
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Varying nominal rigidity in a Calvo rigidity α yyl
- DC and MC models converge as α → 1
Back - Additional results
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Distribution of price gaps [solid] and changes [dotted] yyl
- MC - Random ξ model is between Golosov-Lucas and Midrigan
- DC - Left skewness due to lower price flexibility at low µ firms
Back - Additional results
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Regression - Estimating equationsyl
Across-state, within-product
- Remove quarter t mean for each product category, taken across states
(
ypst − y spt
)
= αt + β1
(
xpst − x spt
)
+ β2
(
xpst − x spt
)2+ εpst
Across-product, within-state
- Remove quarter t mean for each state, taken across product categories
(
ypst − ypst
)
= αt + β1
(
xpst − xpst
)
+ β2
(
xpst − xpst
)2+ εpst
Additional details
- ypst - Size and frequency of price change
- xpst - Measures of market concentration
- Standard errors clustered at State×Product levelBack - Main regression Data details
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Regression results - Uniformly weightedyl
Across-state w/in product Across-product w/in stateSize (%) Frequency Size (%) Frequency
Eff. number of firms 0.205*** -0.664*** 0.138*** -0.667***(0.018) (0.088) (0.042) (0.133)
Eff. number of firms2 -0.018*** 0.014 -0.017 0.099(0.004) (0.017) (0.014) (0.070)
Observations 32,016 32,016 32,016 32,016R-squared 0.061 0.078 0.009 0.016Quarter FE ✓ ✓ ✓ ✓Revpst control ✓ ✓ ✓ ✓
- Standard errors clustered at State × Product level
Result
- Hump-shaped profiles of price flexibility by market concentration
- Robust to either source of variation
Back - Main regression
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Regression results - Number of goods weightedyl
Across-state w/in product Across-product w/in stateSize (%) Frequency Size (%) Frequency
Eff. number of firms 0.186*** -0.516*** 0.147*** -0.661***(0.034) (0.134) (0.051) (0.176)
Eff. number of firms2 -0.024*** 0.026 -0.030** 0.177**(0.007) (0.031) (0.015) (0.074)
Observations 32,016 32,016 32,016 32,016R-squared 0.061 0.078 0.009 0.016Quarter FE ✓ ✓ ✓ ✓Revpst control ✓ ✓ ✓ ✓
- Standard errors clustered at State × Product level
Result
- Hump-shaped profiles of price flexibility by market concentration
- Robust to either source of variation
Back - Main regression
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Regression results - No revenue controlyl
Across-state w/in product Across-product w/in stateSize (%) Frequency Size (%) Frequency
Eff. number of firms 0.244*** -0.956*** 0.220*** -0.894***(0.038) (0.181) (0.043) (0.181)
Eff. number of firms2 -0.048*** 0.183*** -0.041*** 0.227***(0.010) (0.050) (0.012) (0.072)
Observations 32,016 32,016 32,016 32,016R-squared 0.100 0.095 0.028 0.031Quarter FE ✓ ✓ ✓ ✓Revpst control ✗ ✗ ✗ ✗
- Standard errors clustered at State × Product level
Result
- Hump-shaped profiles of price flexibility by market concentration
- Robust to either source of variation
Back - Main regression
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Regression results - Rev. share top firmyl
Across-state w/in product Across-product w/in stateSize (%) Frequency Size (%) Frequency
Rev. share top firm -1.411*** 7.727*** -1.436*** 6.099***(0.428) (2.015) (0.392) (2.286)
Rev. share top firm2 -9.739*** 16.939** -3.546 13.318(1.964) (7.817) (3.126) (17.419)
Observations 32,016 32,016 32,016 32,016R-squared 0.133 0.107 0.027 0.016Quarter FE ✓ ✓ ✓ ✓Revpst control ✓ ✓ ✓ ✓
- Standard errors clustered at State × Product level
Result
- Hump-shaped profiles of price flexibility by market concentration
- Robust to either source of variation
Back - Main regression
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21
Static Nash - Varying ω1yl
0 0.25 0.5 0.75 1
Preference weight - ω1
ηη−1=1.1
1.5
2.0
2.5
θθ−1=3.0
A. Firm 1 mark-up
Equal sized duopoly: (0.5, 1.2)
1.2 = 0.5(σ+η)0.5(σ+η)−1
0 0.25 0.5 0.75 1
Preference weight - ω1
0
0.20
0.40
0.60
0.80
1.00B. Firm 1 revenue share
Equal sized duopoly: (0.5,0.5)
Preferences
C =
[∫ 1
0C
θ−1θ
j dj
] θθ−1
Cj =
[
ω1c
η−1η
1j + (1− ω1)cη−1
η
2j
] ηη−1
- As ω1 → 1, µ1 converges to monopolistically comp. markup under θ
- As ω1 → 0, µ1 converges to monopolistically comp. markup under ηBack - Nested models
Simon Mongey, ”Market structure and monetary non-neutrality” p.21/21