Product Differentiation, Fiscal Policy, and Free Entry

Entry is recognized to be an important issue in macro models considering imperfectly competitive markets. However, two lines of research have been kept apart: the homogeneous-product oligopoly approach, where entry means more firms in the industry, and the monopolistic competition approach, where it means more brands. Our model tries to go beyond these limitations, considering a small open economy within a monetary union (characterised by a fixed exchange rate and perfect financial capital mobility). In this economy each industry produces a differentiated non-tradable good and is composed several Cournot competitors. Competition works at both the intraindustry and sector level. Decisions on both taxes and government expenditure are taken by the economy’s government, i.e., fiscal policy is decentralised within the monetary union. Since the model generates multiple equilibria, three types of entry are considered: more firms (I), more industries (II), and a combination of both (III). Fiscal policy is shown to be effective on aggregate output under the three cases. Its effect on welfare is mainly walrasian in case II, but it can be keynesian when market power is high in cases I or III.

Comment on "Productive Public Expenditure and Imperfect Competition with Endogenous Price Markup"

In this note we show that the claim from Chen et al (2005) that their model generates an endogenous markup is incorrect. This is not only a nomenclature issue: using the �fixed markup which we show to be the only one consistent with the structure of the model implies the main conclusions in that paper do not hold. In particular, government expenditure in infrastructure cannot affect the business cycle in this model by deliberately changing the market structure of the economy.Endogenous markup

Market Power and Fiscal Policy in OECD Countries

We compute average mark-ups as a measure of market power throughout time and study their interaction with fiscal policy and macroeconomic variables in a VAR framework. From impulse-response functions the results, with annual data for a set of 14 OECD countries covering the period 1970-2007, show that the mark-up (i) depicts a pro-cyclical behaviour with productivity shocks and (ii) a mostly counter-cyclical behaviour with fiscal spending shocks. We also use a Panel Vector Auto-Regression analysis, increasing the efficiency in the estimations, which confirms the country-specific results.Fiscal Policy, Mark-up, VAR, Panel VAR.

A Simple Business-cycle Model with Schumpeterian Features

We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new ‘prosperity plateau,’ but contractionary shocks only affect the market power of mature industries.Entry; Hysteresis; Mark-up.

Productive Public Expenditure and Imperfect Competition with Endogenous Price Markup: Comment

In a recent article Chen et al. (2005) analyse the role of government expenditure in an imperfectly competitive static model, introducing a government-expenditure externality through the production function. Our purpose in the present paper is to argue that the claim from the authors that their model generates an endogenous markup is in our view incorrect. We argue that their model does not contain an endogenous markup, but a fixed one and that their claim is based upon an incorrect interpretation of what is the marginal cost in their own model.Endogenous markup.

Fiscal Policy under Imperfect Competition: A Survey

This paper surveys the link between imperfect competition and the e¤ects of fiscal policy on output, employment and welfare. We examine static and dynamic models, with and without entry under a variety of assumptions using a common analytical framework. We find that in general there is a robust relationship between the fiscal multiplier and welfare, the tantalizing possibility of Pareto improving fiscal policy is much more elusive. In general, the mechanisms are supply side, and so welfare improving policy, whilst possible, is not a general result. Key words: Fiscal Policy; Imperfect Competition.

Market power and fiscal policy in OECD countries

We compute average mark-ups as a measure of market power throughout time and study their interaction with fiscal policy and macroeconomic variables in a VAR framework. From impulse-response functions the results, with annual data for a set of 14 OECD countries covering the period 1970-2007, show that the mark-up (i) depicts a pro-cyclical behaviour with productivity shocks and (ii) a mildly counter-cyclical behaviour with fiscal spending shocks. We also use a Panel Vector Auto-Regression analysis, increasing the efficiency in the estimations, which confirms the countryspecific results. JEL Classification: D4, E0, E3, H6Fiscal Policy, Mark-up, Panel VAR, VAR