Concentration, stagnation and inequality: An agent-based approach

Abstract

This paper presents a macroeconomic agent based model with endogenous innovation-driven growth and knowledge accumulation which aims to analyze the underlying causes of the recent increase in market concentration, by focusing on the interplay of technical change and market power, and the resulting macroeconomic consequences in terms of higher inequality and lower growth. The source of concentration lies in the fact that heterogeneous firms do not have equal access to capital-embodied innovations, as we assume that this depends on the “knowledge gap”, i.e., the difference between the degree of capital good’s technical advancement and the firm’s accumulated technological knowledge. The analysis shows that, in the absence of consistent knowledge spillovers and as long as capital goods remain considerably different from each other, technical progress generates systematic differences in productivity across firms, leading to a reallocation of market shares towards more productive firms. Consequently, as the newly-emerging large firms seek to translate the enhanced market power into higher mark-ups, the resulting shift in the income distribution from wages to profits eventually undermines aggregate demand and growth. Yet, simulation experiments reveal that the evolution of market concentration over time as well as its macroeconomic effects crucially depend on the presence (or lack thereof) of legal entry barriers, which, by influencing the process of diffusion of technological innovations, reinforce (or attenuate) the large firms’ ability to consolidate their dominant position and thus exploit their market power.