Abstract
We study the foundations of firms' market power in a continuous-time model where agents are price-makers who interact explicitly with each other. Market power arises from the existence of rents, the size of which depends on consumers' outside options, and firms' ability to appropriate these rents through rent seeking. We study how measures of market power (e.g., markups, concentration) are affected by search frictions, monetary policy, and self-fulfilling beliefs. As meeting speed becomes infinite, there exists a sequence of equilibria along which market power vanishes. But there can also exist equilibria where rents remain positive and firms behave as monopolists.
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