peter praet : market power - a complex reality speech by mr peter praet, member of the executive board of the european central bank, at the eib / compnet conference, luxembourg, 18 march 2019. * * * diagnosing and quantifying firms ’ market power – the ability of firms to maintain prices above marginal cost – has long been a central topic for economists studying industrial organisation. 1 on the basis of detailed firm - level data, researchers analyse the market power of firms in specific industries. for a long time, market power was of little interest to macroeconomists, including central bankers. it first entered the field of macroeconomics as a topic of interest in the mid - 1980s, but only with a narrow focus on the cyclical pattern of markups – the margin firms charge over the marginal cost of output. in part, this is because macroeconomic models are generally founded on kaldor ’ s stylised facts, such as a constant labour share, constant profits and a constant capital - to - output ratio. such models implicitly assume that there are no trend changes in firms ’ market power. recently, however, trend changes in market power have elicited interest from macroeconomists following a number of us - based studies that challenge the underlying conventional assumption in macroeconomic models, namely that firms have constant market power. these studies document a rise in the market power of us firms over the past three decades, and especially since 2000. such changes in firms ’ market power at the aggregate level can have important macroeconomic implications. they could affect investment and the pricing behaviour of firms, but also productivity growth and, therefore, the natural rate of interest. for a central banker, it is thus of crucial importance to understand whether and how the prevailing level of firms ’ market power is evolving. in theory, it is fairly straightforward to define market power. in practice, however, it is difficult to pin down the level and evolution of market power empirically. there are two reasons for this. first, markups are not directly observable. second, there is no one - to - one mapping between firms ’ market power and point - in - time markup estimates. a firm with a small markup at any given moment can have significant market power when its pricing strategy aims to build up an ever - larger market share. as a result, assessing the level of firms ’ market power requires a variety of approaches to

. van reenen ( 2017 ), “ concentrating on the fall of the labor share ”, american economic review 107 ( 5 ), 180 – 185. business dynamics have also declined significantly in the united states, as documented for instance by decker, r., j. haltiwanger, r. jarmin and j. miranda ( 2018 ), “ changing business dynamism and productivity : shocks vs. responsiveness ”, nber working papers 24236. 3 see cavalleri, m. - c., a. eliet, p. mcadam, f. petroulakis, a. soares, and i. vansteenkiste ( 2019 ). “ concentration, market power and dynamism in the euro area ”, forthcoming as ecb discussion paper. 4 for details, see cavalleri et al. ( 2019 ). similar results were also shown in dottling, r., g. gutierrez and t. philippon ( 2017 ), “ is there an investment gap in advanced economies? if so, why ”, proceedings from 2017 sintra forum on central banking, pp 129 – 193, deutsche bundesbank ( 2017 ), “ mark - ups of firms in selected european countries ”, deutsche bundesbank monthly report december 2017, pp 53 – 57 and t. valetti, g. koltay, s. lorincz and h. zenger ( 2018 ), “ concentration trends in europe ”, mimeo, european commission. 5 see, for instance, dıez, f., d. leigh and s. tambunlertchai. ( 2018 ), “ global market power and its macroeconomic implications ”, imf working paper 18 / 137 and de loecker, j. and j. eeckhout ( 2018 ), “ global 4 / 5 bis central bankers'speeches market power ”, nber working paper 24768. 6 see oecd ( 2018 ), “ maintaining competitive conditions in the era of digitalisation ”, oecd report to g - 20 finance ministers and central bank governors, july 2018. 7 see zingales, l. ( 2017 ), “ towards a political theory of the firm ”, nber working paper 23593. 5 / 5 bis central bankers'speeches