At a recent Centre for Economic Policy Research (CEPR) event, panelists, including the Stigler Center’s own Luigi Zingales, reflected on the roles antitrust enforcement and corporate greed play in the current inflationary environment. Other potential factors behind the high contemporary inflation are identified and discussed, including the Covid-19 pandemic, supply chain disruptions, expansive monetary and fiscal policy, and Russia’s invasion of Ukraine.

See the following recording of the panel session, with the transcript below:

Tommaso Valletti:

So hello everyone, thank you for joining. I’m welcoming you from a very hot London. Thank you wherever you are connecting from. I’m particularly grateful to the French speakers and those based in France because today is the day of Bastille, so it’s a big day for France. And so I’m very grateful to Basile in particular, and others also, Thomas, because it’s a big holiday of course.

So very briefly, I will introduce this event today. This is the CEPR Competition Policy RPN. This RPN is about one year old. It was set up by Greg and Cristina a year ago in order to be a platform, hopefully the key platform, for discussion, but sometimes a critical discussion, on competition policy and its interaction with academic work. And in fact most of us are academics. Some of us also have policy experience. And we had a feeling, a perception, that sometimes research and policy are disconnected or are not connected enough. So we want to really try to join them as much as possible. I think, in fact, this is a very exciting period for IO and competition policy, especially if we are prepared to have broader views, and a broader influx also of researchers from other fields. And today is going to be a case in point.

Because competition policy deals with companies, and very often very rich companies, there is a very strict disclosure policy that we have in the RPN. Today is not particularly relevant because it’s a private event, so it’s not that people will be excited, et cetera, so we really want to have a frank discussion. But to stick to our disclosure policy, I have nothing to disclose apart from being the academic consultant of the CMA currently on one case in the UK. So that’s my only disclosure.

Now we move on to the second part, which is in fact the main event on today, which is inflation and corporate greed. You know, I’m sure you’ve seen lots of these discussions on social media. People have very strong views. Sometimes it’s part of the reaction of academia; we’re very parochial. My view on this is that sometimes the macro people don’t entertain the idea that there may be market power issues because their models typically do not account for heterogeneity and market power because it’s hard. Instead, in IO, we gave up any macro ambitions because we look at very loud things and so we lost the bigger picture. And then I was saying sometimes that this is what is also, in that case.

So I think this is going to be an easy conversation today. Okay, we’re not going to find a solution to a huge problem in our economies, but we have very accomplished panelists from different fields in economics. I asked them to reflect on some questions about the causes of inflation, whether the underlying cause, of course, may be some fiscal policies during Covid, but maybe the effects that we observe may be related also to microstructure issues. Is that possible? And can market power explain some of these spikes? And then we’re going to talk about whether our models are fit for purpose both from the macro side and the IO side. And then the solutions. Can solutions involve perhaps also tightening of competition policy, or not?

So these are the big questions, and we will have a variety of views. As Luigi suggested, when you’re going to make your remarks, perhaps you may want to tell whether you have in mind the US, or the eurozone, or the UK, because obviously these are very different economic areas.

But I’ll start with Luigi. The floor is yours. The idea is, we’ve got an hour for all of our remarks, or perhaps a couple of rounds of five minutes each. You can also react to each other, and people can also put questions in the chat, and there will be time at the end for questions. Thank you, Luigi.


Luigi Zingales:

Thank you, Tommaso. Can I share, I have a couple of slides, nothing major. And my preamble is, I am probably the least competent of all this panel, so I will start. I think Tommaso correctly pointed to me at the beginning for the big picture, that is, saying very vague facts and nothing dramatic. So I will start with a little bit of my relatively uninformed view of what are the causes of the recent bout of inflation, which as we all know is a global phenomenon but lived very differently in different countries.

So as you see, the UK is the top in the scale. But even in Switzerland and Japan, by starting from a much lower level and going to a much lower level, we see a significant increase in inflation. And I did something that is basically illegal to do because there are too few data, et cetera, but I wanted to divide among the major countries: what was the inflation at the beginning of 2021; what was inflation at the end of 2021; and then the latest reading available, which reflects a lot of the oil shock due to the Ukrainian war. And what we, what I at least can see is that the US and the UK are at the very top of what I call the policy shock because there the inflation rises very early on, way before the war. And this policy shock is present a little bit everywhere, but of course it is much different. So in Japan you see the inflation going from minus 0.7 to 0.8, so not something to really worry about, versus in the United States, it goes from 1.4 to 7.

And then you have the oil shock that is actually, not surprisingly, relatively small for the US but very big for countries like Italy. In fact, Italy is the country where you see one of the largest shocks for that.

Now when you think about the cause of inflation, there is only an embarrassment of choice because you had three major supply shocks: the pandemic, the supply chain disruption, and the oil shock. And even early on in the pandemic, everybody would say the pandemic will create a drop in demand, would not create inflation. I think part of it is that inflation was not measured properly. Because there was an unavailability of stuff, so if you wanted to buy a Peloton in April 2020, you would have to wait forever. Which is not measured as inflation because we’re not good enough to import that but in fact was inflation. And if you are trying to get safely into a restaurant, you have to pay a fortune. So basically, at the beginning of the pandemic, some stuff became unavailable and was not measured as inflation but it was; the supply shock was inflation. And then of course we had the supply chain shock from the ports to whatever in China, et cetera. And then the oil shock. And this is at the same time as we had an extremely expensive (and this is my value judgment, excessively expensive) fiscal policy in most of the countries, and so the monetary policy.

So I think that if we were to try to claim that market power is the main culprit of inflation, I think we would be kind of crazy in my view. However, I think it could be an important concause. We see that there is a huge variation depending on the markets you consider. And most importantly, because the past is great but we cannot change it, I think it could be an important obstacle in reducing inflation in the future. So I think that what our panel and our analysis in the future should focus on is more on number two and a little bit on number one.

So, I’ve seen this paper, I don’t know if you’ve seen it, that comes out of the, I think the Roosevelt Institute, where they replicate Jan De Loecker and they extend it a bit into 2021. And what I would like to ask this expert panel because they’re much more expert than I am, you see like a dramatic increase in 2021. Is this just an accident? Is this the result of some mechanical features? Or is that real? And if this is real, is it a proof of market power? Or simply that, you know, there are bottlenecks? And if you are Peloton and all of a sudden there is a long line for your product and you can’t get material for more bicycles, so what you’re going to do, you’re going to increase prices. Is it because you have market power, or simply because there is a temporary shortage? Now, what is interesting in the study is that they look at the increasing markup distributed by the initial markup. And what they find is that the markup went up where it was higher to begin with, so a kind of a Matthew effect in markups, which is interesting by itself because, if you think of it, there should be kind of an upper boundary over how much you can mark up things. But it seems like here that, at least in this short period of time, you don’t see that.

And so, I think that the question that I would like to sort of transfer to the panel is: Is this rise simply a direct effect of supply restrictions? And what kind of restrictions? Some might be exogenously given. Like, if you cannot import microchips from Taiwan, you cannot produce  Teslas. This is not really anything that we, in the short term, can change in the United States. But there is another kind of supply restriction, which is that restaurants are struggling to hire new workers and, as a reaction, they increase prices. Now we know that there is a way to hire new workers, which is to increase wages. So this is more indulgence. They choose not to increase wages, but they prefer to increase prices. So the question is, why is that the case?

And two, that I’ve seen that these supply restrictions make it easier to coordinate the price increase. If I am Ford and I know that GM has the same sort of issue with a microprocessor, I feel confident in raising prices, knowing I’m not going to lose a lot of market share because they cannot flood the market with their products, and vice versa. So maybe you start with a very concentrated market, and then you add this shock, and this shock makes it easier to coordinate (of course, tacitly collude, not explicitly, but tacitly collude) to a higher price increase.

Or is this increase in response to stimulus-induced demand? That may be. And we know that a lot of money, at least in the United States, a lot of money was transferred to families. And there are some interesting data coming from JP Morgan suggesting how much liquidity less-wealthy income families tend to have today vis-a-vis any other situation in history. So one of the interesting questions is how they will respond to an increase in interest rates. Because generally there was a direct channel, both in rates and availability of credit, that was jeopardizing purchases by the low-income part of the distribution. Now they have a buffer, so maybe they don’t respond to monetary policy the way they used to.

And then, what percentage of companies are simply passing through some cost? I think that what I will ask or invite people to do is more specific studies about who raises the prices more, and why. And, because this is interesting also to see, how this will be undone. So, if this is just a temporary effect, like the Peloton effect? We know that now you can buy a Peloton online for a fraction of the cost because nobody wants them anymore; in fact, Peloton is in financial trouble. So that’s a temporary phenomenon. But, if Ford and GM coordinated on a price increase, I think that this is going to stick; it’s not going to go back anytime soon, even if all of a sudden supply becomes more available.

So with this, I think I’ve exhausted my time and I’ll let the rest of the panel talk.

Tommaso Valletti:

Thank you, Luigi. A lot of questions. I’m sure we’re going to get back to some of them. But next, it’s quite nice since you mentioned the work of De Loecker, Eeckhout, and Unger. So, we’ve got Jan who’s going to tell us about markups, among other things.

And perhaps you’re going to tell us more about why markups in 2021 seem to be particularly at the highest-ever level.


Jan Eeckhout:

Thank you very much, Tommaso, for having me on here.

I think I’m going to follow up on much of what Luigi has said. I should also say that I’m going to talk about inflation. You’d think, “Here’s a market labor guy who’s before been talking about IO and now he’s going to talk about inflation!” So, you know, sometimes you might see things that you should rightly question.

So first of all, is market power the same as corporate greed? I would like to open this for discussion. I’m going to say something more about this also in a bit. But let me start with some very basics, okay? So if you think about inflation, inflation’s about levels of prices. And all the, not all but many of the measures that we have for market power—say markups or profit rates—are about ratios. And so you could have prices going up, or rather, you could have markups going up while prices fall because your costs fall even further. I mean, if you think about semiconductors and Moore’s law, the productivity of semiconductors has gone up a lot, so the cost goes down very sharply. So the price per unit over quality is going down, but you could still have increases in the markups. So, I think we have to make a distinction between levels and ratios here. And inflation is all about levels.

Then the second thing is the time horizon. I think we should think of market power as a very slow-moving process. It’s about huge investments. It’s about firms making innovations in a way to create maybe some market power. And on the other side, inflation is very fast. I mean, if you think about the surgical masks market in March 2020, you know, prices jumped from about five cents per mask to a dollar fifty in a very short period of time. And so I think we should compare really, you know, the movement of markups and market power as an oil tanker, and inflation the way at least we’ve seen recently as a jumping sodium. It’s something that changes in a very different timeframe.

The third thing is magnitude. If you look at inflation without talking about the nine percent per year, as Luigi showed, markets we’ve seen going up at most one percent on average per year. Now there’s of course a lot of heterogeneity across firms, but that’s also true with inflation. There’s a distribution of inflation. And so magnitudes are very different.

And the last basic fact is that, if a central bank has the right tools and pursues the right policies and is credible, then basically there will in the long run be no inflation larger than two percent. And if you think about models (and I’m going to come back to models in a second) but if you think about, you know, how we typically model inflation, this is coming from the fact that agents in the economy cannot adjust their prices instantaneously. So basically, unless you

have a a Calvo price adjustment probability that goes to zero so firms or households can now adjust their prices instantaneously, then that’s the only way in which you can have inflation in the long run. And so now there’s of course a big caveat to that. Are the central banks doing the right thing? Is the Taylor rule the right rule that they’re using?

Then in addition to these basics, what are the facts on “corporate greed” or on markups? I’m going to basically complement much of what Luigi said here. But first of all, firms increase their prices mainly because they can. Now the question is, what is the reason why they’re doing it? And so what we’ve seen, I think, in the last two years is that firms have increased their prices as much when they were in a competitive market as when they were in a non-competitive market. And if you think about the market for surgical face masks, I think it was a clear example. It’s a very competitive market. Firms increased their prices because there was just more demand than there was supply, and so that’s what’s going on. Now, is this why the supply is larger than the demand, is it… sorry, the demand is larger than the supply? Is it because of demand factors, or supply factors? And both have been going on at the same time, as Luigi was pointing out.

Now market power is something different because, in a sense, a firm can exert market power because somehow they can restrict the entry of competitors. And so that’s not necessarily an issue of supply being larger than… again, the demand being larger than supply. I mean, so, you know, many of these firms with market power, they can actually produce much more. It’s just that they manage for some reason to restrict the amount that’s being produced because that’s beneficial to them because they can charge higher prices and then therefore create higher profits. In terms of this kind of corporate greed, of course, clearly corporate greed is bad when it’s price gouging. In the sense that, if on 9/11 someone sells a bottle of water for 50 dollars in downtown Manhattan, everyone will agree that this is some form of corporate greed. I mean, this is price gouging.

The question is, in the case of the surgical face mask, was it corporate greed that the price jumped to one-fifty per mask? Maybe it was a good thing. I know of some person here in Europe who, you know, who’s in the business but didn’t make surgical face masks. He sells stuff to hospitals. And then he sees this price jump. He invests immediately in machines, invests 900,000 euros, it’s very expensive at the time because the machines are of course in high demand, and he has to ship it by air, air is very expensive at that time in March 2020. It turns out that, you know, he’s operating within a month, selling face masks at a dollar fifty. Now, by July the price of the face mask is back to five cents. And so, yeah, maybe this wasn’t so bad after all, that these prices jumped, because this created a huge incentive for firms to enter and to basically expand that supply. I don’t think there’s going to be any government who would have been able to plan and say, “Let’s make sure that there’s now more supply of these surgical masks.” It was really the price incentives and the profit that these firms were making that did it. Of course, anyone who had made the investment before had a windfall profit; they weren’t, you know, expecting this. And so we see these jumps in the profit. But it’s a bit like a Schumpeterian “creative destruction” kind of argument, that you get some gain that provides incentives for entering into this market.

So, what are the effects? Yes, indeed. So basically, with Jan De Loecker, we’ve looked over since the pandemic at what happens to these markets, the same thing that this Roosevelt Institute paper does. One of the reasons we haven’t written about it is because there’s, in the short run, there’s an issue with data availability. And that spike actually in 2021 might come from the fact that the data was not available; Compustat (they’re using Compustat data) is actually quite slow in updating the data, and you have a big selection in the most recent data. And then the reason why Jan and I didn’t write it up is because we can’t really say anything short run because we really won’t be sure that we have the data to be able to say something about 2021 now, but not about 2020 for example, okay?

But in any event, we do see that profits have been rising just after the pandemic. Basically what firms did is, in March they of course had a drop in their marks and profits. The first thing they did was, they basically laid off people and reduced their inputs. And what happened is, they build their sales up, they actually immediately recovered their profit rate from before. In fact many of them managed to increase it in the short run. And by July, most of the firms were back to their initial markups as before. So this is, I think something’s going on. Of course, we don’t know whether these markups or this profit are up because of these, again, supply restrictions in this sense. Or demand, excess demand, that happened also in competitive markets, okay? Profits. There’s as much corporate greed in markets with market power as there is in markets that are competitive.

The second fact that we see about the firms is that, or at least in the aggregate, that price inflation is higher than wage inflation. So wages are not catching up.

I want to make one digression here. I think we should make a distinction between all other goods and natural resources because natural resources—especially anything to do with energy, not just oil, but also any kind of electricity provision—of course this is a very different product. A different good. This is a good that’s typically inelastically supplied. And so basically, I mean, you just have to look at what happened in Russia. This was given as a present, I mean through of course quite a brinkmanship of the oligarchs, but they were basically given these resources. And it’s not that it was their ability to particularly exploit these well that they became rich. They just managed to get access to these resources. And if you have this inelastic supply of goods where any little investment really makes a big difference, then of course you’re going to get these huge swings in windfall profit. And on top of it, you have gaming of the system of many of these energy providers and these highly regulated markets because they’re natural monopolies. And so you get these price swings when there’s a huge change in the external circumstances, like a war. I think there we need a lot different ways of thinking about assigning, basically, the goods. Norway I think does a pretty good job there. They have designed the market or a mechanism to do this optimal extraction, even if you’re the owner of the natural resources.

So that’s so much for the effects. Let me say something quickly about models. In a sense, in terms of the inflation, you know, maybe the monetary transmission mechanism is now different than what we thought it was, in the sense that it’s in the presence of these supply and demand distortions. So maybe some of these existing approaches are not the right one. I’ve seen some work by Furlanetto and coauthors, and Fortunato, and they have been looking at different ways of analyzing, kind of, the monetary transmission mechanism in the presence of these supply distortions. It seems to be important. Again, I’m not a specialist, I don’t work with these models, and I’m sure that other people, Silvana can say more about it. But I think it’s also important to think, “Okay, what do these models that we have been using tell us, and how far can we go there?”

In terms of the models in IO, one important thing that I think we should also take into account, especially as it’s related to linking inflation to markups or to market power, is the idea of incomplete pass-through. Because there’s incomplete pass-through, any shock is, with more market power, passed on to a lesser extent, if you want. And so that should give you actually less inflation responses to supply shocks. Now of course there’s a lot of other stuff that’s going on. I mean our IO models would predict that, if you have higher profits, you should see more entry. But of course, if investors think that this inflation is short-lived, and you think about IO kind of models where there’s huge upfront investments of entering into a market, then they probably say, “Well, I see these high profits, but this is going to be very short-lived. Why would I make this huge investment to then be later in a market where there’s actually not such a huge profit to relay because inflation is going to be down again, and then all these profits are going to have gone down as well?”

So you know, I think this is where macro meets micro, but again where we have these two different time dimensions that are important. In addition to the temporary nature of the profits potentially and inflation, if that is the case, of course there’s more uncertainty now. There’s higher likelihood that we’re going to have a recession, and in fact the central banks are contributing to that. That again reduces the incentives to invest. On the IO side, we see firms that, you know, “Oh, there’s enormous profits!” but enormous uncertainty at the same time. So they have much less incentives for that reason to invest. And I think that might explain why, despite this huge profit, we don’t see the necessary entry to bring down this profit.

One last remark on models. You know, there’s a third reason in addition to supply distortion and demand distortion, which is basically in the labor market. That is, you know, increased demands by workers for higher wages that pushes up inflation. And I think that there’s a huge question mark for me there because we don’t fully understand it even in competitive markets. So basically, what we know is that job searchers, towards the end of the boom, tend to search more actively, more to increase their wages rather than to get better jobs. And that’s feeding inflationary pressure. Whereas in the beginning of the boom, they’re in bad jobs, they just want to get better jobs, and get higher wages like that. And so, because there’s this difference over the cycle, now the question is, how does that vary when there’s market power? We know nothing. At least I know of no papers that have done any work on that. And I think, to me that’s an open question. But you know it seems to me that, at this point, that the labor market channel seems to be not the main one compared to the supply and the demand distortions.

So the bottom line is that, you know, we have a lot of things going on at the same time. I would say supply and demand distortions mainly. But at the moment, I see market power and the inflation pressures, two fairly orthogonal mechanisms that are going on, that seem to generate similar outcomes—higher profits and higher prices—but they’re as orthogonal for this reason: the speed, the magnitude, you know, levels and ratios. And so at the moment, I find it hard to believe that market power is going to be causing a nine percent inflation that we see, whereas we see, you know, typically on average a one percent increase in the markets.

And so I think, you know, I probably raised more questions than I’ve answered. But at the moment I’m coming down on these two orthogonal mechanisms not directly being able to explain the whole rise in inflation.

Tommaso Valletti:

Thank you Jan, very interesting. So your views are quite clear.

I would just comment that there was an interesting conversation going on in the chat in the meantime on pass-through. And the answer is, it depends whether demand is log concave or log convex.

And to me, this is one of those instances where I see a disconnect between academia and policy. I mean, this is very different from the messages that Andrea was actually telling us. Indeed this is the right answer in the context of a very specific model. But then I really am interested to know whether enforcers have ever estimated a log linear demand or a log convex demand system and whether this has ever had any traction with a policy maker. And my personal answer is, no. Which means that perhaps, yes, let’s do that kind of research and publish it in our papers and in our universe, but if you’re interested in policy, this doesn’t lend itself to any policy conclusion. It’s not actionable. Therefore, maybe we should change our models. Make them simpler in some respects, but also more meaningful in other respects. But having said that, I know nothing about, you know, monetary policies.

Now I would like to move to Basile.

Basile, I think, is doing very interesting exciting research because Basile is exactly trying to put together industrial organization and the macro approach, or looking at the value chain using input-output tables and putting oligopolistic interaction there. So he’s really trying to do that, so this is really the frontier. It’s tough. It’s tough, but I really would like… That’s why we invited you. Because we think you’re doing something very valuable.


Basile Grassi:

Thank you very much, Tommaso. I hope everyone can hear me well. Can I share some slides that I’ve prepared for this for this event? Let me just use the time I’m sharing the slides to thank Tommaso for his, you know, for putting this event together which is very much a hot topic and something that is, that we kind of think has been very important.

So, I hope you guys can see my slide. So, you know, let me… I’m a macroeconomist, and therefore I’m a bit simple, and so then let me give you a simple view of the link between inflation and corporate markup. First, inflation is linked to the growth rate of price. And we tend to believe that price is usually equal to a markup which is the margin that firms are charging over the nominal marginal cost.

And then you see the same simple accounting kind of equation. The rise in growth rate really gives you a link between inflation here, and the growth rate of this markup, and potentially the growth rate of the nominal marginal cost. So I think Silvana told us something relevant. Potentially, if the growth rate of those markups is high, then that should translate into an increase in price and therefore increasing inflation. So potentially there is, you know, some sort of simple mechanism that we kind of all have in our unconsciousness, of remembering from our first year macro class, that maybe a link between this growth in markup could lead to inflation. I think that’s kind of where you could see a link between inflation and that.

However, when we go into the data, you know, thanks to the work by Jan and De Loecker, we’ve made huge progress in our ability to measure those margins, and we know we have kind of reliable measures at the firm level of those markups. And then once you aggregate those markups, depending on the way you aggregate them, you get that the average growth rate for those two time series are between 0.2 and 0.3 percent. Just by simply, you know, taking those simple equations I just showed you and trying to do some sort of back-of-the-envelope calculation, you see that the growth rate of those markups is of the order of 0.2 or 0.3 percent, while the growth rate of that inflation over the same period is something like 3.2 percent. So the growth rate of markup, kind of a measure of corporate greed, is an order of magnitude smaller than the growth rate of prices—than inflation. So that’s kind of, you know, why we’re all very skeptical about the potential role of corporate greed as a phenomenon that will lead to a big spiking in inflation today.

And especially there’s more of a conceptual argument which I think Jan kind of described very well which is that, you know, this markup tends to be determined by many things, and especially: changing technology, the difference between fixed or variable costs, the change in market structure, the role of entry, of competition, and also by antitrust enforcement. And we tend to believe that all those factors are slow-moving, in the sense they are not moving at the business cycle frequency at which we tend to study inflation. So overall, you know, together with this kind of back-of-the-envelope calculation where it seems that an order of magnitude is defined between the growth in corporate greed and the growth in inflation, together with kind of this conceptual framework that the deep determinants of markup and market power tend to be slow-moving compared to change in inflation.

However that doesn’t mean that any, some sort of, imperfect competition or corporate greed doesn’t have any role to play in the current period we’re living in now. Especially because, you know as Luigi was pointing out, a big part of this rise in inflation both in Europe and in the United States is I think shown to be supply driven. Like, supply chain disruption problems.

But essentially the key mechanism that market power delivers is something called incomplete pass-through. And I think that was mentioned in the chat also. So, you know, what is the pass-through? Just so actually everyone is on the same page. Pass-through, at least in this set of slides, you think about how much price change following a one percent increase in the cost. And empirical evidence on those pass-throughs tend to show that large firms—firms that tend to have a high market power—tend to have a pass-through about half of those of the firms that face a more competitive… that charge a lower markup, and face a more competitive environment. And that’s kind of, people in international trade literature and international macro have tried to estimate those numbers. And that kind of makes sense because, you know, following a negative inflationary supply shock like we’re kind of living in today, those high-markup firms, they can reduce their markup before increasing their price. So they can use the slack of their of their markup, of their margin, to not pass on the total increase in their cost to the price. So in that sense, you know, a corporate-greed or market-power firm can help to mitigate the effect of supply driven, negative supply shock. And this type of mechanism—especially the heterogeneity of pass-through—it tends to be absent from textbook macromodels, despite the fact that there is some evidence on this role of incomplete pass-through among large-markup firms versus low-markup firms.

For instance, there is this very recent paper by economists from the ECB who have classified sectors into high-markup and low-markup sectors and have computed inflation rate for those two types of groups. I mean, there’s many caveats to that work, but at least it’s kind of indicative that, as you can see on this slide where the inflation rate of high-markup sectors is drawn with a dashed line, you can see that the dashed line is much less volatile than the solid line, which is the inflation rate for low-markup sectors. So it seems that this kind of incomplete pass-through seems to be consistent, at least in this piece of evidence.

Those guys are well-trained macroeconomists and therefore they have used some macroeconometric techniques. They namely identify or run a VAR to see the response of a low-markup inflation rate versus high-markup inflation rate in response to a series of shocks: oil supply shock, global demand shock, or monetary policy shock. And they also have found that a sector where markups tend to be low tends to deliver higher inflation than a sector where markups tend to be high. So in that sense it seems that there is some support, some empirical evidence to show that, maybe the differential response of the role of a market structure, of industrial organization, in transmitting those kind of supply driven negative shocks into prices.

And that’s kind of what we would like to do. We would like to put more IO in macro by introducing those type of mechanisms. The ideal model should include this very well-thought incomplete pass-through theory our IO economist colleagues kind of have thought for years, together with a monetary macro model to study how that interacts with inflation.

So there is some recent work based on that. I found Mongey, Olivier Wang and Ivan Werning. But there is, you know, another kind of… so, this first work, they wanted to see how imperfect competition interacts with nominal friction. They have found that money is more non-neutral when you have strategic complementarities in pricing through oligopolistic competition. And there is also new, a potential new channel of the transmission of monetary policy that, by affecting the distribution of markup, monetary policy could actually affect productivity or at least measure aggregate productivity.

But overall it seems that there is kind of a missing block here which is: We would like to have more macro research to study between the role of, or the interaction between inflation, imperfect competition, and antitrust policy. As Tommaso was saying—if you go back to my first equation, which is price is equal to markup over marginal cost—by implementing, by enforcing some regulation, antitrust decreases the markup and then creates a one-off decrease in prices. Although, there is a difference in temporality in the sense that it takes years or months for the competition authority to reach a decision, that might… No, which is not at the right frequency to respond to an increase in energy price like we see today.

So that’s, I think, that would be my view here.

Tommaso Valletti:

Thank you, Basile. Actually I have a question.

Is there research on, what I call, how prices transmit within the value chain according to how concentrated the value chain is? So take electricity prices. Electricity prices may increase for various reasons. One reason is because the underlying cost is going up. Or, because there is a demand shock and, therefore, prices are increasing through a completely different… So is there anybody trying to do this? Value chain, and how concentrated each element in the value chain is, to explain how price is… ?

Basile Grassi:

Thank you Tommaso, to extend, you know, it’s really kind of like the next level I should have put here. Which is, this incomplete pass-through will depend on different sectors or different places on the value chain.

For instance, the energy sector is something that is very much upstream. You know, it’s a sector that supplies to all the sectors and that, like, takes time between the energy producer central and the goods you receive on your desk. It takes time to propagate. And then the incomplete pass-through along this supply chain is definitely a determinant of how fast an increase in energy price leads to an increase in final goods price—the final good that consumers face. So there is definitely very important work to be done on that. There is not much yet, some work, you know.

We still have been struggling to understand where the supply chain disruption comes from. You know, is there something beyond the simple supply shock? Like in some region in China that is under lockdown and therefore not producing any goods. Or between that and a shortage of semiconductors. We’re still trying to, struggling to, understand exactly how that leads to increasing price, and to what extent the pass-through of those value sectors along the supply chain matters. To be able to give you a quantitative answer, I think that’s still research that needs to be done.

Tommaso Valletti:

That’s fantastic, that’s very useful, thank you Basile.

Next we will have Jose. Jose Azar also has devoted lots of thought to this question. Jose, I think you also have a couple of slides you wanted to share? You’re muted.


Jose Azar:

Yeah, can I show them? Okay, let’s see. Oh wait, it says “host disabled participant screen sharing…”

Ah, yes.

So, inflation and market power. It’s been a pretty heated discussion in policy, on Twitter and in many places. And it’s very interesting because it’s very hard, you know, for IO economists to think about macro issues, and vice versa. And so how do I think about this? I try to think about it, but it’s not easy.

So, what are the ways in which market power could affect inflation? I mean, one is, it could affect it directly by increasing markups, with all the caveats there, which is that anything that you say about any… Let’s say you have something like a markup shock. So the markup goes up, does that lead to inflation? Not necessarily, because anything that you say has to be mediated by some monetary policy response function. Right? By some monetary policy rule.

But then it could also affect it indirectly. Because it could affect pass-through of monetary and supply… demand and supply shocks, right? I really meant demand and supply, but I wrote supply shocks. And this is where the initial discussion started, you know.

I started thinking about this because, I think Hal Singer tagged me on Twitter when he did this graph of concentration from Compustat and inflation. And he was claiming that the places that, the industries where concentration was higher led to… experienced higher inflation during the period since Covid started. And I looked at this, and I didn’t agree. So I started discussing with him in a friendly way, and saying I really didn’t see that pan out in the data.

And then more recently there’s been talk about asymmetric pass-through. The rockets and feathers theory and empirics. Which means there could be more pass-through in response to an increase in costs than to a decrease in costs. So prices could rise like rockets and drop like feathers; this is the idea. Krugman brought this up last week in an op-ed he wrote. And this could keep retail prices downstream temporarily higher and increase inflation.

So the discussion started with claims that market power had increased pass-through, by Hal Singer. And the Boston Fed paper, Braeuning, Fillat, and Joaquim. It has… They did some distributed lag regressions, also with a Compustat concentration, which many people have criticized.

It has now moved to whether markups have directly increased so much in 2021 that that could lead to an increase in the price level. Again, not a permanent increase in inflation rates, but a jump in the price level, which is what we may be seeing now. I mean, that would also be experienced as inflation. So there’s the paper by Konczal and Lusiani that came out a few weeks ago. I’m skeptical of that, but I’m open to be convinced by evidence. Also, well, there’s the discussion started by Krugman last week about the rockets and feathers theory and evidence. And the paper that started this, I think, was Borenstein, Cameron, and Gilbert, 1997, that looked at asymmetric pass-through from oil prices to gas, or, gasoline prices, right? Not gas prices, but what we would call petrol prices in Europe.

So the open question, I think, is, when you put all of this together, “Is market power quantitatively important to explain current inflation?” And I mean, I’m very skeptical of that. I think that Hal thought I would be sympathetic to this because I think market power is very important and we should study it. But it doesn’t mean that necessarily I think it plays a big role in the recent inflation, why my prior… But that doesn’t mean market power in principle can have no effect. Obviously market power affects prices. But I just think at the macro level it’s very hard to… My prior would be it’s not really behind the current inflation. I mean, in part this may be in this prior…

Just for disclosure, well, first of all I should disclose I have no consulting cases or anything to disclose. I should also disclose I’m from Argentina. The inflation rate in Argentina is currently 60 percent. The government, one of their main policies to combat inflation is price ceilings, and they sometimes claim that inflation is due to corporate greed. I mean, I think that’s very hard to believe, you know? So I think that we’re seeing a similar kind of political dynamic at a much less spectacular dimension.

But what happened, I mean, the world economy was hit by a catastrophe. A catastrophe that was Covid. And the government responded by increasing the deficit and spending money, which was necessary, and some of these deficits were monetized. And so the year-on-year rate of change, I mean, there was a big pulse of monetary growth in the US during the Covid recession in which money growth was more than 25 percent year-on-year. So to me, if anything, the thing that needs an explanation is, why isn’t inflation even higher than the nine percent that we’re seeing now? Because money growth was 25 percent. The proximate answer is, velocity of money went down. And again, monetarism is a little bit outdated, but still you would expect that when there’s such a big increase in the rate of growth of money that it would lead to an increase in prices in the economy. That money growth has now gone down and monetary policy is tightening, so I wouldn’t expect this to be permanent. But it could last for a while because the money supply in the US, M2 money supply, is about 40 percent, more than 40 percent higher than it was pre-Covid. Prices haven’t increased nearly as much. So I think that there could be room for more expansion prices just from this temporary shock that eventually will go away as it’s absorbed fully. Now, I’m not really an expert that can tell you exactly how much more prices will increase and whether velocity of money will come fully back to where it was, but I think this is something to look at.

Also in addition to this monetary expansion, we saw an increase in oil prices. First the oil price crashed, and it went even negative in the US in April of 2020, but then since then it has been increasing more or less steadily. There was a big spike right before the start of the war, but I don’t really see a big break in the trend around the world. So this makes me a little bit skeptical that the oil price increase is mostly due to the war. If anything, it is maybe something that is used to deflect attention from other things, like the monetary expansion.

So, okay, Hal Singer had done a graph like this with concentration from Compustat on the x-axis. I redid these graphs using markups from De Loecker, Eeckhout, and Unger into and ending Q4, that I calculated using their elasticity, their latest elasticity, and then the most updated Compustat data. And I see that where there was more market power, prices increased less. So this makes me skeptical of these claims that were being made that market power had a big role to play in rising inflation.

I’ve also run some vector panel vector autoregressions using PPI data at the four digits level. And what we see here is an interactive panel VAR, so just a simple model that summarizes the joint dynamics of prices, oil prices and Nakamura-Steinnson monetary shocks. And we see much more pass-through from monetary shocks to prices in low–market power markets than in high–market power markets, where the increase in prices in response to the same shock is much lower. And also, in response to oil shocks, the pass-through is much lower in more concentrated markets.

I think this speaks to Nancy Rose’s comments saying—and this was the discussion about theory, you know, that it’s a little bit nerdy—and she said low concavity versus convexity. But the way I interpret that nerdy discussion is, this tells us it’s an empirical question like Nancy is saying. I think that the empirics suggest that, in higher market power industries, pass-through is lower. So an increase in market power over time, if anything, it would make the pass-through of the oil shocks and the monetary shocks to inflation less. This lower pass-through is also consistent with the models that people mentioned, of Mongey 2021 and Wang and Werning 2020.

At the same time in this same VAR, I mean just as an aside, we do see that monetary shocks (these are expansionary monetary shocks, I put a minus sign) if anything, monetary shocks are an increase in interest rate, these are a reduction in interest rate. And monetary expansion has a very large effect on the oil price. So in terms of pass-through, it doesn’t seem that pass-through is helping us say, “Well, market power is causing inflation.”

On the other hand, Konczal and Lusiani came up with this paper a couple of weeks ago showing that there’s this big spike in 2021 in the De Loecker and Eeckhout markup. I’m pretty skeptical of this because of the following. I mean, there was a big spike in the De Loecker and Eeckhout’s markup in 2016, which was the last year of their data in their version. Now that the data’s updated, that spike has basically gone away at least by half, and the spike has gone to the last year. So I think there may be some data issues there and we need to look into it.

At the same time, all the caveats that people mentioned apply. Just because the markup went up doesn’t mean that there’s going to be inflation; it depends on the monetary policy rule. In particular, there has been this very large increase in markups, although I guess Basile says year-on-year it is not that large. But we haven’t really seen a very high inflation period. Okay, this may be related to how inventories are accounted for, and things like that. Chris Conlon has said some things to this effect on Twitter.

And then today I looked at these rockets and feathers regressions, and I do see some evidence of asymmetric pass-through, although it seems to come not from a very big jump here, as was seen in the Borenstein regressions. It’s like, when I add this pre-period—so I add these forwards to the distributed lag model, I do exactly the same ratio as them, I add forwards to see a pre-trend—there seems to be this anticipation, this pre-trend in the positive price increases, and so we see this asymmetry. But if I exclude the Covid period, if I just run from 1990 to 2019 and I stop in 2020, they look almost the same. I mean, almost identical. So I’m also a little bit skeptical of the rockets and feathers story for empirical reasons.

Tommaso Valletti:

Thank you Jose, thank you very much. So, skepticism.

But now we have Thomas Philippon. We rely on you, Thomas, to give us the final truth.


Thomas Philippon:

That’s a tall order! Well, first of all thank you very much.

Since I’m last, let me just try to summarize a little bit why there is so much confusion today. I think it’s important to keep in mind the background first.

So, we come to 2019 and we have a long history of research in macro and IO, but it’s kind of focused on slightly different questions, and also it tends to push in a direction which is the opposite of what we see today. Typically, the first thing is, there’s been a lot of work on the pass-through issue. The pass-through that we’ve looked at a lot is, “A one percent increase in marginal cost. What does it do to the price?” Now, as we discussed also in the chat with Nancy, that depends on the model you write on obviously, so that’s why it’s important to have some empirical evidence. The evidence we have—and consistent with what we just saw in the previous two presentations—is that typically the pass-through is lower when firms have more market power. That’s the classic results.

Now, it’s also important to understand that, over the past 20 years, we’ve worked very hard to reduce the volatility of inflation in our models. Because, remember that in 2010 we were writing papers about the, missing this inflation, right? So the puzzle was like, “Inflation should have remained much lower. It did not.” Okay, so that pushed us towards writing models where really the price setting of firms is not very sensitive to marginal cost, which is why inflation doesn’t move that much either up or down. And that was by far the main focus of the literature.

It was also true after 2009–2010 because we had big changes in oil prices also. I mean, oil prices today, if you look at Europe, they are the same today as they were in around 2014. But if you look at 2010 to 2014, oil prices went up by just as much as they did recently, and inflation didn’t move. So all of these models were geared toward explaining why you could have big swings in marginal cost or even energy prices and no big swing in inflation. Inflation was very stable in these models. And you get that by having pass-throughs that are stable and also tend to be a bit lower when firms have market power. So that’s one thing.

The second thing is what happens if, how does the economy change if market power goes up, right? Now it’s not in response to shock, it’s just the impact of market power. So in the paper with Jones and Gutierrez, we look at: How does the economy respond, what happens to inflation, if you have an increase in entry costs, for instance. Well it turns out that inflation doesn’t move. Now that’s surprising because you think, well, the one equation in the model is going to have the markup. If the markup goes up, prices should go up. And if you add staggered Calvo style price setting, you’re going to get inflation (although it might take a bit of time for the price level to go up). Well, that’s true. But the thing is, if you increase entry costs and you decrease competition, you also have a negative impact on a great demand because typically employment and investment are going to go down. It turns out they just exactly cancel each other. So that also explains why you could have a period of rising market power and markups since say the late 90s or early 2000s and yet inflation barely registering anything.

So that’s where we started, okay? That’s how we arrived at the thing.

Now, given these models, it’s pretty clear that the safe conclusion is the one we already heard, which is, it’s very unlikely that market power would explain the current inflation, for two reasons. First, there was no obvious change in market power over the past two years. Second, the pass-through effect doesn’t really go in the direction you want. Typically, more market power lowers the pass-through; it does not increase it. Okay, so that’s kind of what we had from the past. So the safe conclusion then is to say simply that, “Look, the current inflation is really not due to market power—either a change in market power, or existing market power interacting with current shocks. So that’s not the place where we should direct policy.” Of course, what I’ve argued is that I think that’s a plausible argument.

On the other hand, there’s still the opportunity cost argument. Just like structural reform in a labor market, which you want to do when unemployment is low, now is a good time to do antitrust policy. It’s not that market power is the cause of inflation. But if, for whatever reason, inflation is high, now is a good time to tighten antitrust requirements or other regulations that may increase competition. Now, this policy may not be very optimal if you’re in a deflation; you could debate that, there is lots of research on that especially in the 1930s. But then there’s the opportunity argument. So I think the safe conclusion that most economists have reached is like, “Well okay, market power is not the cause of inflation. But on the other hand, it’s a good time to do antitrust. You might want to do it for other reasons, and as a side effect you might have a small negative impact on inflation, which is good.”

Okay, so I think that’s kind of the safe conclusion.  Now I want to challenge that a little bit in the sense that, I don’t know the true answer, but I think there is a lot of uncertainty behind that.

So the first thing to notice is that, all the big inflations, typically there’s always some mixture of perfect storms. There is always more than one thing going on. So today, if we didn’t have at the same time a very large stimulus package in the US, which itself is a consequence of what happened in 2008 where the fiscal response was too small, policymakers concluded, “Well, we won’t do that again! Next time it’s going to be at least as big as it needs to be,” then they ended up making it too big. You know? That’s been well discussed in the literature; the last round of stimulus in the US was probably twice what it should have been, given the size of the output gap. Well, that came from the history of the 2009 failed response. Now you add to that the impact of the Covid disruption on supply chains and on the labor market. Maybe these two things together would not have been enough to create that much inflation. But then you add the war in Ukraine. Okay. My point here is that it’s rarely the case that one thing is driving everything. When you have big bouts of inflation, it’s usually the perfect storm kind of thing, which is many things going on at the same time. And that’s what we saw in the 70s. I think that’s part of what we saw today.

Which is why you end up today with the one thing that’s for sure, that we are near a period of maximum uncertainty and confusion in the macro data. If you look at the macro data, jobs and GDP growth tell you different things, wages and prices tell you different things, and even consumer confidence and spending also tell you different things. So there is definitely a case for the fact that the economy today is very uncertain and very confusing to analyze. So in this context, I think that we should be more open to other sources of changes in price setting. And I just want to mention one which I think is probably, or potentially, just as important as the one we’ve discussed so far.

In macro, when we said “the pass-through,” macroeconomists on the panel, every time we said that, what we meant is: the pass-through from the marginal cost to the price setting today. But there is another pass-through which is critical in the New Keynesian model: the pass-through from expected inflation to current inflation. And it turns out, that one is actually, it depends a lot on the IO structure but it also depends just as much on the price setting structure.

And I just saw a recent paper by Ivan Werning showing that that pass-through from expected inflation to current inflation can vary a lot, depending on the details of the models and the price setting. It could be close to zero, it could be much more than one.  Now that’s the part where we don’t understand very well. And I would argue that, in today’s environment, it’s probably a big one. I’m pretty sure that many firms setting their prices today are thinking about what are: the expected inflation; and, the expected impression of their competitors.

And this is not the kind of things we looked at over the past 20 years. This is not the usual pass-through calculation. And on that one, there is a lot of scope for new research, and potentially there, a role for market power. It’s just we don’t know. But I think that, in terms of pass-through, the current, at least in my mind, the current focus should be at least in part on this inflation expectation pass-through,  and how it differs across markets.

Thank you.

Tommaso Valletti:

Thank you, Thomas. Also very good. I really enjoy your safe answer and then the more challenging one that relies on the New Keynesian models, et cetera. That’s very good.

So guys, we have another five minutes if we want. I think it’s been a very nice afternoon together. First I want to thank CEPR for hosting us. Thanks a lot.

Anyone from the panel, from the audience, if you have a comment or a question to ask, that’s your time. Just unmute yourself and ask a question. First in, first out. Any questions from the audience or from the panelists, reaction from the panel?  There is Nancy, and then Jan.

So, Nancy?


Nancy Rose:

I actually just put it in the chat, which people can look at. I’m interested in… I think capacity constraints explain a ton of the really sharp price increases in many of the sectors that are getting a lot of attention. You know, not crude oil but gasoline, which is subject to refining constraints. Meat processing is big in the US. That debate. Baby formula here as well.

Is anybody doing any empirical work on whether we could credibly link tighter capacity constraints to the lack of competition, either through, you know, tacit collusion (like it’s been alleged in the airline industry) or explicit coordination or something? I just think if we were going to push the link between antitrust and some of these price spikes—not inflation but price spikes—that that might be a productive place to look. And I’m just wondering if anybody on this call knows about work in that space.

Tommaso Valletti:



Jan Eeckhout:

Well, I can’t help with Nancy’s question, but I just wanted to pick up on Luigi’s point about the trade-off in terms of monetary policy, which may be different when there is market power.

I think the thing that we should not forget is that (you know, I mean, I’m the first to be guilty of it) is that we show average markups, but really it’s all about the distribution of markups that changes. And I think that’s going to be very important for monetary policy. The fact that Basile put up is that the pass-through is actually lowest for the large firms, and so we know that this heterogeneity has become much more important. Most of our macro models are representative firm models; there is heterogeneity maybe in productivity but not so much in terms of the markups. And I think that could be very important for the trade-offs that the monetary authorities are going to be facing.


Cristina Caffarra:

I wanted to say something in response to Nancy very briefly because I very much agree with her point.

I don’t know of any systematic work on this, Nancy. But I think, anecdotally, based on my experience: I have, over 20 years, seen the serial concentration of chemicals, pharmaceutical, agrochemical. Various base sector, not even… we’re not talking digital here. And the outcome of that has been a systematic rationalization of capacity, which has led to capacity tightening. And I, like you, have a strong sense that, in current circumstances, this is certainly helping to push prices up, and it is related to the inflation phenomenon. So it is a way in which antitrust has a mechanism, weak antitrust has had a mechanism for in some way facilitating some of this.


Tommaso Valletti:

That’s great.

So we have so many questions. We haven’t answered anything, not my question, but we have lots of stuff to do, which is always good for researchers. And it’s also very nice to see this dialogue happening between researchers from different fields with a common passion, which is policy and markets. And that’s, I think, a very good outcome of this afternoon’s conversation.

So I want to thank the CEPR for organizing this, for hosting us. It’s been a very nice conversation.

Thank you.