Endogenous Market Structures and the Business Cycle


  • This work is part of a larger research project which includes the companion paper (Colciago and Etro, 2007). We are grateful to seminar participants at the University of Saint Andrews, CERGE-EI (Prague), University of Amsterdam, the IMT (Lucca), the University of Rome, the University of Milan, Bicocca, the Catholic University of Leuven, the University of Osaka, the University of Tokyo and the Central Bank of Hungary for important suggestions. Guido Ascari, John Beath, Florin Bilbiie, Lilia Cavallari, Alex Cuckierman, Alberto Dalmazzo, Mark Gertler, Fabio Ghironi, Mario Gilli, Stefano Gnocchi, Giammario Impullitti, Pietro Peretto, Tiziano Ropele and Patrizio Tirelli provided insightful discussions on this topic.


We characterise endogenous market structures under Bertrand and Cournot competition in a DSGE model. Short-run mark ups vary countercyclically because of the impact of entry on competition. Long-run mark ups are decreasing in the discount factor and in productivity, and increasing in the exit rate and in the entry costs. Dynamic inefficiency can emerge due to excessive entry under Cournot competition. Positive temporary shocks attract entry, which strengthens competition so as to reduce the mark ups temporarily and increase real wages: this competition effect creates an intertemporal substitution effect which boosts consumption and employment. Endogenous market structures improve the ability of a flexible prices model in matching impulse response functions and second moments for US data.