Low Competition Traps

Abstract

We develop a multi-industry growth model with oligopolistic competition, endogenous entry and variable markups. At the heart of our model is a complementarity between capital accumulation and competition, which may give rise to multiple steady-states – steady-states characterized by high output/competition can coexist with steady states featuring low output/competition (low competition traps). Negative transitory shocks can trigger a persistent transition from a high to a low steady-state, making the economy follow a path that resembles in many aspects the great recession. We show the likelihood that the economy enters a low competition trap can increase in the degree of firm heterogeneity. A calibrated version of our model can rationalize important features of the great recession in the US, such as the persistent drop in output, the increase in the profit share, the decline of the labor share and the decline in the number of firms.