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Investment-Goods Market Power and Capital Accumulation

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Abstract

We develop a model of capital accumulation in an economy that imports investment goods from large firms with market power. We model investment-goods producers as a dynamic oligopoly and characterize the equilibrium with a Generalized Euler Equation. We use this characterization to analyze the evolution of investment and prices. The markup on investment goods acts as an endogenous adjustment cost, which decreases as the economy grows. We calibrate the model to simulate the post-2020 shocks to demand for semiconductors. The model attributes the equipment-price increase mainly to increasing marginal costs. Finally, we analyze policy interventions to address market power.

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  • Fabio Bertolotti & Andrea Lanteri & Alessandro Villa, 2024. "Investment-Goods Market Power and Capital Accumulation," Working Paper Series WP 2024-13, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:98999
    DOI: 10.21033/wp-2024-13
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    1. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, March.
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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