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.

Dominant firms may exercise monopsonistic power over workers, in ways which have implications for profit and labour shares. Consistent with that, there is some empirical evidence linking market concentration to a lower labour share (Autor et al (2017)). How monopsony power influences wage growth and the slope of the Phillips curve are important areas to consider further. Third, there is further work to be done in understanding the balance sheets and decision incentives of socalled “superstar” firms. This includes their choice of debt versus equity, distributing versus reinvesting profits and intangible versus tangible sources of capital. These choices might imply quite different incentives and behaviours – for example, about the level of investment and its interest elasticity. These are yet to be fully explored, at a micro and macro level. Fourth, the emergence of a set of firms with significant degrees of market power clearly raises big questions about the appropriate stance of competition policy (Gutiérrez and Philippon (2018)). These policy issues are clearly outside of the remit of central banks. Nonetheless, how these anti-trust issues are tackled could have implications for the structure and dynamics of the economy and hence for the setting of monetary policy. This, too, is an area ripe for further research. Finally, the apparent puzzle between the secular rise in mark-ups at the firm level on the one hand, and relatively low and stable aggregate inflation on the other hand, could usefully be reconciled. Current estimates of mark-ups using firm-level data may suffer from mismeasurement.