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EconomicsPart of Economic, Social and Political Science

2301 Market Power and Income Distribution: Lessons from Hybrid Industrial-Labour Economics

Discussion Paper "Market Power and Income Distribution: Lessons from Hybrid Industrial-Labour Economics", by Jian Tong and Carmine Ornaghi 


Over the recent decades, the income gap between capital and labour has widened, a shift accompanied by an increase in dominant firms’  market power. To understand the underlying causes of this phenomenon, we construct a hybrid industrial-labour economics model that integrates imperfect competition in both product and labour markets, which underpins a post-neoclassical theory of income distribution, going beyond equation of input price to marginal productivity, and capturing rent-sharing mechanisms more generally. We also develop a novel empirical method for estimating production function, markup and markdown powers, which we apply to a panel of UK manufacturing firms. Our method is based on the factor-cost-share approach á la Solow (1957), but applied only to the competitive fringe firms that have little market power, designed for achieving unbiased estimation. Our analyses attribute the root cause of dispersion in market power to the
large disparity in firms’ productivity, which we show, left to persist and entrench, will lead to both income inequity and inefficiency. Our research underscores the importance of addressing market power concentration and entrenchment in order to promote equitable and  efficient economic growth.

Keywords: firm heterogeneity, inequality, multifactor productivity, market powers, markup, markdown, oligopsony, rent sharing, income distribution, estimation of production function, identification method.

JEL Classification: D21, D33, D43, D6, E24, J2, J3, L4


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Discussion Paper 2301


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