Abstract
In this paper, a model of competition in supply functions is used to analyse the relationship between market power and inflation. The model encompasses a range of market structures with Cournot and Bertand competition as polar cases. To the extent that inflation is driven by demand shocks, firms with market power are likely to respond by increasing margins, and thereby amplifying the inflationary impact of higher demand. This analysis is relevant to debates about the role of market power in recent US inflation. • Most macroeconomists don’t believe that market power has any effect on inflation. • An analysis of competition in supply functions shows that this is incorrect. • Our model spans a range of equilibria from Bertrand to Cournot.
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