UNIONS' AND FIRMS' PRODUCT MARKET POWER: THEORY AND EVIDENCE

Laura Marsiliani

There is evidence that imperfect competition plays an important role in the aggregate economy. The paper presents a methodology for quantifying the degree of imperfection in actual economies, namely the firms’ product market power and the unions’ bargaining power. The motivation of this paper is that, since these parameters depend on the deep structure of the economy, they are unobservable and as such need to be derived and estimated from the agents’ optimality conditions. For this purpose we develop a dynamic general equilibrium model of imperfect competition from which empirical relationships are derived. Applying cointegration techniques, we estimate a system of production-and price equations, where the relevant restrictions from our theoretical model have been imposed, and an Euler equation for wages. Finally we recover the firms’ product market power and the unions’ bargaining power for the Italian aggregate economy.

Keywords: Imperfect competition, price markup, union power, Euler equations, cointegration, error correction model, simultaneous equations system.

JEL classification: C32, C50, E2, J5, L1.

Correspondence to:
L. Marsiliani, Department of Economics and Finance, University of Durham, 23-26 Old Elvet, Durham, DH1 3HY,
UK. Tel: +44-(0)191-334 6363. Fax: +44-(0)191-334 6341.
Email: [email protected] Web: http://www.dur.ac.uk/~dec0lm/

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