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The Cambridge-INET Institute


Joerg Kalbfuss (Cambridge)

"Macroscopic Firms"

Abstract: Many consumer markets evolve into partial oligopolies where firms with and without market power coexist. I develop a simple model of dynamic competition that explains this pattern. Starting from a market in which neither firm exerts market power, companies innovate to stochastically adjust their product offerings. Whether firms with market power emerge from this process or not depends on three primitives: the volatility of firm growth, degree of taste dispersion, and the hazard rate of aged companies. In case large firms appear, current welfare levels mostly hinge on their characteristics even though there may be a large mass of fringe competitors. This opens the potential for welfare inference with scant data. Furthermore, the fringe contributes to welfare primarily as a 'seedbed': partial oligopolists emerge as the frontrunners of the ongoing race of stochastic product innovations, so their expected quality increases in the number of competitors. Through this mechanism the fringe's measure is a first-order determinant of welfare even if its output is not.

When: Monday 10th May 2021 - 1:00pm - 2:00pm

Where: Zoom

Reading Group: Theory Workshop

Theme: information

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