Rise of the superstar firms: Taking oligopoly seriously in macroeconomics

Xavier Vives 20 January 2021



Market power is back on the agenda of politicians, as well as in research. This is due to increasing concentration in markets, increasing margins, a decreasing labour share, and the dominance of ‘superstar’ firms such as the giant technological platforms, or ‘Big Tech’ for short (Autor et al. 2020, De Loecker et al. 2020). A further factor is the increasing influence of Big Tech in society, which raises concerns in authorities. Some evidence of the increasing prevalence of this issue is the recent surge in antitrust cases against Big Tech in Europe, the US, and China.

Despite the fact that oligopoly theory is well established (Vives 1999), macroeconomic analysis traditionally uses the monopolistic competition model where a firm is negligible in its market while retaining some market power. This has been the case because of tractability reasons. Michal Kalecki (1938) was an early proponent of the integration of oligopoly in macroeconomic analysis.

More recently, oligopoly markets have been introduced in macroeconomic and trade models, but mostly in the context of a very large ‘continuum’ of sectors in such a way that a firm has market power in its sector but has no influence within the wider economy (Neary 2003, Atkeson and Burnstein 2008).1 This seems untenable in modern economies. To use an extreme example, the approach would imply that Samsung or Hyundai have no influence on the economy of Korea. The same could be said of Google/Alphabet, Apple, Facebook, Amazon, and Microsoft (or 'GAFAM') in the US. For example, if we want to examine the claim made recently by Daron Acemoglou (2020) that “Big Tech’s most pernicious effects on economic growth and consumer welfare may stem less from ‘anticompetitive and exclusionary practices’ than from its role in directing technological change more broadly”, we indeed need a model where those firms are capable of influencing the economy.

The question arises of how to make compatible the evolution of concentration with evidence on the evolution of margins, corporate profits, and labour share. This is not immediately obvious, since the increase in concentration in relevant antitrust markets is moderate (Shapiro 2018). It is worth noting that according to the monopolistic competition model, the explanation for the increase in margins lies in less differentiated products. However, it does not seem plausible that large changes in product differentiation happen in relatively short spans of time.

The introduction of oligopoly in general equilibrium models in the 1970s fell flat in applications because of technical problems. Indeed, Gabszewicz and Vial (1972) introduced the ‘Cournot-Walras equilibrium’ concept to deal with oligopoly in general equilibrium assuming firms maximise profit. However, there is a problem with such an assumption, since then equilibrium depends on the choice of ‘numéraire’ – a very undesirable feature. In fact, there is no simple objective for the firm when firms are not price-takers, since ownership structure matters when firms can influence product and factor prices. Leading models assume a representative household that owns a market portfolio in all the firms, as the classic Dixit and Stiglitz (1977), or the oligopoly models in Atkeson and Burstein (2008), Neary (2003), and Berger et al. (2019). Yet the firms are assumed to maximise their own profits even though no shareholder would actually want this. We see, therefore, that there is a tension between the assumed ownership structure and the profit maximisation assumption in these models.

In a new study (Azar and Vives forthcoming), my co-author and I build a tractable general equilibrium model under the assumption that the firm’s manager maximises a weighted average of shareholders’ utilities in Cournot–Walras equilibrium.2 The weights in a firm’s objective function are given by the influence of each shareholder. This approach bypasses the ‘numéraire problem’ because indirect utilities depend only on relative prices. Further, this approach allows us to integrate the evolving ownership structure of firms, where large funds have stakes in several firms in the same industry as well as in the overall economy. Indeed, as a consequence of the increase in institutional investment, large diversified asset managers hold a high proportion of firms’ shares, particularly in the US. The extent of common ownership patterns due to the increase in institutional investment has raised concerns of increased market power and markups (Azar et al. 2018, Banal Estañol et al. 2020), as well as calls for antitrust action and regulation of common ownership (Elhauge 2016, Posner et al. forthcoming).

In our model, firms are large in the economy and have influence over prices and wages. For example, when making decisions about hiring, a firm with monopsony power realises that increasing employment would result in increased wages which would hurt not only the firm’s own profits but, in the presence of common ownership, also the profits of other firms in its shareholders’ portfolios. The ownership structure contemplated allows investors to diversify along both intra- and inter-industry lines. Our model identifies the key parameters driving the economy: the elasticity of substitution across industries, the elasticity of the labour supply, the market concentration of each industry, and the ownership structure (i.e. the extent of diversification) of investors.

We find that with non-increasing returns to scale in a one-sector economy, increased effective market concentration – arising out of either fewer firms or more diversification (common ownership) and measured by a modified Herfindahl–Hirschman index – depresses the economy by reducing employment, output, real wages, and the labour share. This provides a link between increasing market power and potential secular stagnation – as conjectured by Larry Summers. Further, when firms have different technologies with constant returns to scale, an increase in common ownership leads to a more concentrated market because more efficient firms then gain market share at the expense of less efficient ones. In the extreme, less efficient firms exit the market as common ownership increases. We see therefore that the pattern of increasing market concentration and shift of market share from small, low-markup firms to large, ‘superstar’, high-markup firms described by Autor et al. (2020) may be partially explained by the increase of institutional investment and common ownership, and not only by technological factors.

In a multisector economy, there are more effects to consider in the presence of common ownership. When the manager of a firm in an industry is deciding whether to marginally increase its employment and production, they must consider three effects: (i) the increase reduces the relative price of the firm’s own products, (ii) it boosts real wages, and (iii) it increases the relative price of products in other industries (because overall consumption increases). The first two effects are anti-competitive, making the firm less aggressive, while the third one is pro-competitive. This third effect, which is an inter-sector ‘pecuniary externality’, is internalised in the presence of common ownership involving the firm and firms in other industries. In this case, the markdown of real wages relative to the marginal product of labour increases with the modified Herfindahl–Hirschman index values for the labour market and product markets and decreases with the pecuniary externality (weighted by the extent of competitor profit-internalisation due to common ownership). The result is that common ownership always has an anti-competitive effect when increasing intra-industry diversification, but that it can have a pro-competitive effect when increasing economy-wide diversification. The latter happens when the elasticity of labour supply is high in relation to the elasticity of substitution among product varieties. In this case, the relative impact of profit internalisation on the level of market power in product markets is higher than in the labour market.

Our new model is mostly methodological, but we also put it to work successfully to simulate the decline in the labour share in the US on the basis of the evolution of concentration in product and labour markets, as well as the estimated internalisation of profits of other firms out of the increase in common ownership of public firms. We have extended the model in Azar and Vives (2019a) to include savings and capital, and also approximate the decline in the capital share. We do not go as far as claiming that common ownership is the cause of the evolution of markups and markdowns and of the decline of labour and capital shares in the US economy, but certainly that it is consistent with their evolution and that has the potential to help explain it.

The results obtained have consequences for competition policy pointing to the need to go beyond traditional partial equilibrium analyses of competition policy, where consumer surplus is king. It follows that in the one-sector economy, competition policy fosters employment and increases real wages by reducing market concentration (with non-increasing returns) and/or the level of diversification (common ownership), which act as complementary tools. Lowering market concentration remains a valid approach under non-increasing returns to scale. When there are multiple sectors in the economy, in order to maximise employment, intra-industry diversification should be limited, while economy-wide diversification may be optimal when the elasticity of substitution in product markets is low relative to the elasticity of labour supply. Further benefits of diversification (common ownership) such as internalising technological spillovers and increasing productivity should also be contemplated (López and Vives 2019).

In summary, it is high time that oligopoly is integrated with full force in the toolbox of macroeconomics. The machinery is there and now it should be put to work.


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Azar, J and X Vives (2019a), “Common ownership and the secular stagnation hypothesis”, AEA Papers and Proceedings 109: 322–326. 

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Vives, X (1999), Oligopoly pricing: old ideas and new tools, Cambridge, MA: MIT press.

Wang, O and I Werning (2020), “Dynamic oligopoly and price stickiness”, NBER working paper 27536.


1 See also Berger et al. (2019) for a labor market model and the dynamic models of Ferrari and Queirós (2020) and Wang and Werning (2020).

2 As in Rotenberg (1984) and Salop and O’Brien (2000).



Topics:  Industrial organisation Macroeconomic policy

Tags:  Big Tech, superstar firms, oligopoly, macroeconomic toolbox

Professor of Economics and Finance and Academic Director of the Public-Private Sector Research Center at IESE Business School; CEPR Research Fellow

CEPR Policy Research