Mergers and market power

This project was co-financed by ODISSEI in the 2019 MAG call for proposals.
Researcher: Leonard Treuren, University of Amsterdam

Empirical research has documented the increase of market power in recent decades: firms are increasingly able to price above their costs. In the 1980s, firms charged prices that were on average 21% above incremental costs (De Loecker, Eeckhout & Unger, 2020). By 2016, this had increased to prices 61% above incremental costs. However, the literature finds that both the labor share of revenue, and the capital share of revenue, have decreased over time. That is, of all the money earned by companies, an increasing proportion is going to the owners by way of profits, and a decreasing proportion is paid out to both capital and labor.

This research project inspects a potential mechanism underlying these trends by examining the causal impact of market concentration on market power using a common shifter of market concentration: mergers and acquisitions. Mergers and acquisitions are the most prevalent means of increasing concentration in a market. What is the causal effect of mergers and acquisitions on market power? How do mergers and acquisitions influence the division of total surplus between labor, capital, and profits? The combination of economy-wide CBS microdata and recent advances in empirical techniques allows these questions to be addressed on a scale not previously seen in the literature.

  • De Loecker, J., Eeckhout, J., & Unger, G. (2020). The rise of market power and the macroeconomic implications. The Quarterly Journal of Economics.

Image: Pxhere via CC0