Three Essays in Macroeconomics with a Focus on Market Power

This thesis includes three essays on macroeconomics. In the first essay, I study the impacts of the rising market power. The market power, which is measured by markups, has risen in the last 35 years of the U.S. corporate sector. Over the same time, the labour and capital shares of income and the real rate of return on capital have declined, while the wealth-output ratio has increased. I argue that in the presence of income inequality, the rise of market power can be one of the main drivers of these trends. To study the trends jointly, I combine the incomplete market model of Aiyagari (1994) with the imperfect competition model of Dixit and Stiglitz (1997). The results suggest that the increasing profit of the corporate sector and its unequal distribution among households, who have a heterogeneous marginal propensity to consume, provide a unified explanation for the above stylized facts of the U.S. economy. In the second essay, I examine the evolution of markups in the Canadian economy. The literature on firm-level markup estimation suffers from two problems: The lack of a reliable measure of variable input and the sample selection bias due to using only publicly-traded firms. To address these issues, I use the T2-Longitudinal Employment Analysis Program (T2-LEAP) database, which has the universe of Canadian firms and the record of wage bill for each firm. The wage bill is more reliable than the commonly used measures of variable inputs, i.e. the cost of goods sold and the operating expenses. The result indicates that the average gross (value-added) output markups increased mildly from 6% (24%) in 2002 to 9% (29%) in 2015. In the third essay, I introduce a new approach to estimate firm-level markups from accounting data. The new approach, which uses economic profit rates and returns to scale of firms, is less sensitive to the choice of the measure of variable inputs. The findings suggest that, in the U.S., the average markups increased by six percentage points, from 7% in 1980 to around 13% in 2018, and the production technology exhibits constant returns to scale.