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Market power amplifies the price effects of demand shocks

Author

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  • Flavio M. Menezes

    (School of Economics, University of Queensland, Brisbane, Australia)

  • John Quiggin

    (School of Economics, University of Queensland, Brisbane, Australia)

Abstract

In this paper, a model of competition in supply functions is used to analyse the relationship between market power and inflation. The model encompasses a range of market structures with Cournot and Bertand competition as polar cases. To the extent that inflation is driven by demand shocks, firms with market power are likely to respond by increasing margins, and thereby amplifying the inflationary impact of higher demand. This analysis is relevant to debates about the role of market power in recent US inflation.

Suggested Citation

  • Flavio M. Menezes & John Quiggin, 2022. "Market power amplifies the price effects of demand shocks," Discussion Papers Series 653, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uq2004:653
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    File URL: https://economics.uq.edu.au/files/39786/653.pdf
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    References listed on IDEAS

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    8. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528-583.
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    Cited by:

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    2. St-Pierre, Marc, 2023. "On market power and inflation," Economics Letters, Elsevier, vol. 226(C).

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