Market power and profit margins in the Euro area countries in the post-pandemic period

The rise in unit profits has been a major factor driving price inflation in the post- pandemic period, in most euro area economies. In the present study, we attempt to analyze the factors behind this rise. One explanation provided by the literature is that the supply bottlenecks observed in the post-pandemic era, facilitated -probably temporarily- the exercise of market power of firms, who then increased their profit margins. In the paper we investigate empirically whether the degree of competition in the markets of the economies, played any role on the extent to which firms raised unit profits. We also test whether the labor market regulations had any effect on the profit margins rise, by keeping labor costs contained. We use annual panel data for the euro area economies for the post pandemic years 2021 and 2022. The econometric results confirm our theoretical hypotheses. The empirical evidence implies that structural features of the product and labor markets of the euro area economies affected price formation at the euro area, at least at the post supply shocks period, thus rendering ECB’s monetary policy against inflation less effective.