Third, the theoretical macro-economic framework we use here – a New Keynesian model with monopolistic competition – may not be appropriate to analyse firm-level changes in mark-ups. The apparent puzzle between the micro-economic and macro-economic evidence deserves further research, given its potential impact on inflation dynamics and monetary policy. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  Market Power – Evidence and Implications  There is a rich micro-economic literature that assesses the impact of market power on pricing and other firm decisions (for example, Tirole (1988)). There has been rather less evidence linking the industrial organisation of firms to developments in the wider macro-economy. That has changed recently, with a number of papers exploring the empirical evolution of (firm, sectoral and national) measures of market power and their implications for the macro-economy (for example, De Loecker and Eeckhout (2017, 2018) and Díez et al (2018)). Perhaps the simplest way of capturing market power is through measures of market concentration, such as Herfindahl-Hirschman Indices (HHI) (Hirschman (1964)) or concentration ratios (the share of sales that accrues to the largest firms within an economy or sector). Evidence suggests that market concentration, measured either through HHIs or concentration ratios, may have increased in the US over recent decades, across a broad range of sectors (for example, Autor et al (2017)). This pattern is not uniform, however, with concentration among European companies showing no such trend (Gutiérrez and Philippon (2018)). The evidence on industry concentration in the UK suggests it occupies a mid-Atlantic position.

Similarly, rating agencies should also be regulated, given the key role they play in correcting information asymmetries on financial markets. Lastly, public authorities should pay greater attention to those financial institutions that are central to the supply of market liquidity and financing. An important starting point is to acknowledge that financial system participants have very different functions, pursue different strategies and operate according to different economic models. This diversity is crucial to the smooth functioning of markets. A one-size-fits-all  BIS Review 161/2008  1  regulatory framework applied to all participants would certainly give rise to herd behaviour and, consequently, reinforce the endogeneity of certain risks. A gradation could reasonably be applied to the regulations and requirements imposed on financial system participants. Three levels, ranging from oversight to regulation, naturally come to mind. The first level would take the form of a mandatory registration and the commitment to comply with a code of good practices. The second – more restrictive – level would include disclosure obligations with regard to activities and accounts, in addition to the mandatory registration and the compliance with good practices. Hedge funds and, more generally, institutions pursuing strategies essentially based on leverage or risk-taking could have to meet such requirements. Finally, the last level would involve more restrictive regulations with regard to activities and risk-taking, as well as closer oversight. In many respects, this gradation system is not only relevant with regard to prudential requirements. It should also apply to accounting rules for example.