Holger Breinlich, Harald Fadinger, Volker Nocke, Nicolas Schutz, 21 November 2020

Much of world trade is dominated by a small number of large firms. Market power becomes problematic for the estimation of gravity equations because many policy interventions also influence market shares and hence prices and the value of trade flows. This column proposes a method to correct the resulting inaccuracies in gravity equation estimation by adjusting trade flows for market power effects by subtracting a correction term that depends on the market share a firm or country has in the market in question. It finds membership in the euro area increases bilateral trade flows by around 48% before correcting for market power, and 58% after correction.

Fernando Arteaga, Desiree Desierto, Mark Koyama, 25 October 2020

The Spanish Crown had a monopoly on the trade route between Manila and Mexico for more than 250 years. The ships that sailed this route were “the richest ships in all the oceans”, but much of the wealth sank at sea and remain undiscovered. This column uses a newly constructed dataset of all of the ships that travelled the route to show how monopoly rents that allowed widespread bribe-taking would have led to overloading and late ship departure, thereby increasing the probability of shipwreck. Not only were late and overloaded ships more likely to experience shipwrecks or to return to port, but the effect is stronger for galleons carrying more valuable, higher-rent cargo. This sheds new light on the costs of rent-seeking in European colonial empires.

Hans Gersbach, 18 October 2019

Michael Kremer, Christopher Snyder, Albert Chen, 26 March 2019

The deadweight loss from a monopolist’s not producing at all can be much greater than from charging too high a price. The column argues that the potential for this sort of deadweight loss is greatest when the market demand curve has a particular (Zipf) shape. Calibrations based on the world distribution of income generate this shape, with disturbing consequences for potential deadweight loss in global markets.

Esteban Rossi-Hansberg, Pierre-Daniel Sarte, Nicholas Trachter, 19 October 2018

Recent literature has documented increasing US product-market concentration at the national level. This column argues that when measured at the more relevant local level, concentration has actually decreased over the last 25 years on average and in all major sectors. In the many industries with diverging national and local trends, top firms are bringing down local concentration even as they increase national concentration. These findings support the idea that top firms expand their national market share by opening establishments in new locations, thereby increasing local competition. 

, 05 October 2016

How did Intel maintain its competitive advantage over AMD? In this video, Michelle Sovinsky explains how vertical constraints helped increase Intel's market share. This video was recorded during the European Economic Association's Congress held in Geneva at the end of August 2016. 

Florin Bilbiie, Fabio Ghironi, Marc Melitz, 13 September 2016

Structural reform and deregulation are often promoted as ways to lower barriers to market entry. The Dixit-Stiglitz model provides an important benchmark – given specific preferences, there is a constrained-optimal amount of producer entry and product variety. This column reconsiders optimality of product creation, differentiating between consumer-producer and intertemporal inefficiencies and quantifying the welfare costs of inefficient entry. Monopoly profits should be preserved when product variety is endogenously determined by firm entry, as they play a crucial role in generating the welfare-maximising level of product variety in equilibrium.

Stefan Gerlach, Peter Kugler, 01 March 2016

The Swiss franc was created in 1850, but the Swiss National Bank wasn’t founded until 1907. The interim was a period of free banking, marked by two successive phases: one of free, unregulated note issue; and then one of strictly limited banking freedom. This column studies the Swiss banking market over this time. The number of banks is found to play an important role in determining the long-run money demand, and in the monetary adjustment process. Further, problems with harmonisation and common regulation created the incentives for monopolisation and centralisation.

Giacomo Calzolari, Vincenzo Denicolò, 20 January 2016

Intel dominates the market for microchips, an essential component of innumerable electronic devices. This column proposes a structured antitrust test that could tackle the issue of how antitrust authorities make decisions on whether a dominant firm’s rivals can compete for exclusive contracts effectively. This decision depends on the size of the dominant firm’s competitive advantage, which isn’t something that we can easily measure but is something that is correlated with other variables, such as the firms’ market shares.

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